The Hindu Business Line : Tata Power: Hold

The spate of new generation projects under execution will see Tata Power transitioning from a utility distributing power to the financial capital to a large power generation company integrated backward into coal mining.

A VIEW of the 427 MW thermal power station of Tata Power at Jojobera near Jamshedpur.

Shareholders can stay invested in the Tata Power stock, which has appreciated 10 per cent in the last seven trading days. The long-term prospects for the company appear bright as the ambitious capacity expansion programme will begin delivering results by 2010.

Fresh buying, with a medium-term perspective, can be contemplated at declines from the current levels linked to broad market trends.

Expansion-driven growth

Tata Power will be adding more than four times its current capacity of 2,300 MW in the next five years taking its total generation capacity to about 15,000 MW.

This includes the 4,000-MW Mundra Ultra Mega Power Project that formally came into the company's fold following the acquisition last week of the special purpose vehicle created for the purpose by the government.

This apart, Tata Power is also planning a 3,000-MW project in coastal Maharashtra that will be fuelled by imported coal, just like the Mundra plant, and a 1,000-MW plant in Chattisgarh based on domestic coal.

The smooth completion of all formalities for the Mundra Ultra Mega Power Project and the acquisition of two coal mining companies in Indonesia that will supply fuel to the project appear to be driving the present positive sentiment in the stock.

The acquisition of the Indonesian companies will secure 50 per cent of Tata Power's requirement of imported coal with the assurance of further supplies on production increases. Coal supplies at preferential prices and long-term fuel security are two obvious advantages for the company flowing from the Indonesian acquisitions.

Low-voltage growth

The expansion projects are critical to Tata Power's revenue and earnings that have remained stagnant over the last five years showing almost flat growth.

While revenues are hostage to fuel prices — low fuel cost means lower prices for electricity supplied — profits are largely a factor of the company's ability to rein-in costs and maintain a high plant load factor, which it has managed to do well ensuring that there is no dip in the bottomline.

Though revenues remained flat, Tata Power continued to increase generation and sale of electricity in unit terms. For instance, in the third quarter of 2006-07, electricity generation was higher by 12 per cent while electricity supplied grew 9 per cent to 3,655 million units.

The third quarter was financially a good one for the company, thanks to a Rs 159-crore tax write-back of provision made in earlier years. The final quarter's profits are likely to be affected by this, as the company is obliged to pass on the tax write-back benefit to its customers.

There is also a worry over the operating margin in the third quarter which, at 17.55 per cent, was the lowest in the first three quarters of 2006-07.

Meanwhile, North Delhi Power Ltd., the distribution subsidiary in Delhi, has been performing exceptionally well in curtailing aggregate technical and commercial losses and the experience in the tough Delhi circle should stand the company in good stead as it bids for other distribution privatisations in future.

Tata Power's stated intent to bid for other ultra mega power projects that are likely to be put up for competitive bidding, and its plans for the transmission line business, augur well for its growth prospects.

Shareholders should note that the company's revenue and earnings buoyancy may not be significant till the new capacities come on stream. As such, the stock is for those with a medium-term perspective.

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