Stock Review: TATA POWER

DESPITE weak operating performance during the September 2010 quarter, the mid-term outlook for Tata Power remains considerably positive. A slew of generation projects, expected buoyancy in coal prices and stabilisation of its distribution and transmission business would be the key growth drivers for the company.

   Tata Power's standalone power generation business is witnessing sluggishness of late. Its operating profit fell by a sharp 25% during the September 2010 quarter following lower sales and higher fuel and other cost items. A solace for investors is a reasonably good performance by its distribution and transmission subsidiaries. Both distribution and transmission utilities recorded significant growth in profits aided by improvement in operating parameters. While the coal business recorded nearly one-third growth in sales with both higher volumes and realisation, the profit growth was muted due to escalation in various costs. With a reasonable operating performance, forex gain and one-off items, net profits was up more than four-fifth on a consolidated basis.

   The forex gain provided significant boost during the September quarter. Gain or loss on this count has seen large fluctuations over the last six quarters, thereby affecting profitability both ways. For instance, in the four quarters of 2009, the company had reported cumulative profit of about . 112 crore through forex gain, which got reversed due to a loss of . 150 crore during the quarter ended June 2010.

   Even though the quarterly performance has been mixed, the mid-term outlook for the company remains quite optimistic. According to the company, nearly 90% of its work on the Maithon power project is complete and the first unit (of 525 mw) is expected to be commissioned by the fourth quarter of this fiscal. The first unit (of 800 mw) of the Mundra ultra mega power project (with total capacity of 4,000 mw) is expected to be commissioned by September 2011. These two units would nearly double the generation capacity of the company and help its growth. The coal business could witness a renewed period of high growth aided by rising commodity prices. However, the existing generation business is still facing operational pressure and may not be able to register any significant change in the near future.

   With weak market sentiments, the company's stock has corrected by about 6% since its results. The nearterm performance of the stock is linked to the markets, but the medium-term outlook looks good. It is trading at a P/E of about 15 times on a consolidated basis, which is lower than that of other power-generating companies.