The Hindu Business Line : Tata Power: Buy

THE Tata Power stock has been subdued in the last couple of months and it is not without reason. A couple of regulatory decisions recently have proved adverse to the company's interests and the rising fuel prices are also imposing some pressure on its margins. Yet, this may be the best time to pick up the stock with a long-term perspective.

The company appears well-positioned to ride out the regulatory blues in the near-term even as it is making some smart moves to grow its business and diversify risks in the long term.

Adverse rulings

The decision of the Maharashtra Electricity Regulatory Commission (MERC) on the long-pending stand-by charges dispute with Reliance Energy went against Tata Power's interests. As a result of the decision, Tata Power has to pay Rs 322 crore to Reliance Energy and Rs 275 crore to the Maharashtra State Electricity Board being refund of past stand-by charges received.

Even as Tata Power has decided to contest the order in the Mumbai High Court, it is clear that the cash outgo may not pose a major problem for the company even if the latter stands by the MERC order. The company has provided a part of the liability in its books while the rest can be adjusted against the substantial reserves that it carries.

The second jolt from the MERC came in the form of an order with a 9.5 per cent lower tariff for Tata Power's supplies in 2004-05. This has already had an impact in the first quarter's results where, despite a 13 per cent increase in generation, the topline remained flat.

However, Tata Power's tremendous focus on cost control came to its aid with operating margins actually improving to 32 per cent from 27 per cent in the first quarter of last fiscal. While employee costs fell by more than half in the first quarter, fuel costs remained at the same level as last year despite the 13 per cent higher generation.

Fuel challenge

The company has been successfully reining in fuel costs by manipulating the fuel-mix for its generation plants. In 2003-04, it increased coal usage while cutting down on fuel oil, which was getting progressively expensive.

The challenge is stiffer now with oil prices at historic highs, coal prices increasing and MERC also reducing the tariffs chargeable by Tata Power. Even as it turns more towards controlling costs, Tata Power could also be aided by the excellent monsoon which will help it to maximise hydro generation and bring down overall costs.

Powerful plans

The next three years could see Tata Power growing exponentially in generation, transmission, distribution and trading.

About 1,500 MW of capacity will be added, including the 1,000 MW Maithon project and the 120 MW Jojobera merchant power plant, which is set for commissioning in the next one year. A 330 MW hydro project in Uttaranchal is also under implementation. In transmission, the company is executing the Tala line with Power Grid Corporation that will evacuate Bhutan power to India by 2007.

North Delhi Power, the distribution subsidiary, is gaining strength in its operations and its progress is in line with the commitments given to the Delhi administration on reduction of aggregate technical and commercial losses. Encouraged by the Delhi experience, Tata Power is scouting for distribution circles that may be privatised by other States. Thus, in the next three years, Tata Power would have a diversified revenue and earnings profile with contribution from generation projects outside the Mumbai area and from transmission and distribution businesses matching, if not exceeding, its revenues from the former.

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