Tata Power

The Tata Power stock has declined sharply in the ongoing market correction. The stock has shed 40 per cent from the peak registered in early January which is in tune with the erosion suffered by the benchmark Sensex over the same period. At the current price of Rs 975, the stock appears attractive for investments with a long-term perspective. The current price represents a 22 per cent fall since our recommendation to book profits in the stock in mid-November 2007.

Of all the power generation companies now implementing projects, Tata Power is placed best in terms of revenue visibility over the medium-term. Financing and fuel have been tied up already for over half the projected capacity addition in the next five years while its subsidiaries in transmission and distribution are beginning to contribute handsomely to the consolidated financial picture.

Financial returns from the investment in two Indonesian coal mining companies has started flowing in even as implementation of the 4,000 MW Mundra ultra mega power project is on schedule. Investors would do well to acquire the stock in small lots taking advantage of price weaknesses caused by broad market factors.
Expansion on schedule

The next five years will see Tata Power adding more than 10,000 MW to its existing capacity of a little under 2,500 MW. While the Mundra ultra mega project will contribute 4,000 MW, there are other big capacity projects such as the 1,050 MW Maithon and the 2,400 MW Coastal Maharashtra projects.

The company is well on track to commission the Mundra project by 2012, two years ahead of the committed date in 2014. While financing was tied up in April, orders for boilers, turbines and other equipment that have a long lead time have already been placed and civil construction has commenced at the project site.

While fuel will come from the Indonesian acquisitions, Tata Power has also tied up the logistics by setting up a shipping subsidiary in Singapore which will take care of the transportation of coal from Indonesia to Mundra.

Meanwhile, funding for the Maithon project, which is a 74:26 joint venture with Damodar Valley Corporation, has been tied up as also the coal supply. The project is on schedule for a 2011 commissioning. In the current fiscal, Tata Power will be adding about 600 MW of fresh capacity mainly at Jamshedpur (120 MW, 74:26 joint venture with Tata Steel), Trombay (Unit 8, 250 MW) and Haldia (120 MW). The full impact of the cash flows from these projects will be felt from 2009-10. Projects adding up to another 5,670 MW are at advanced stages of finalisation.

With funding, fuel and customers tied up for more than 5,000 MW of projects under implementation, visibility in revenues and earnings is high.
Subsidiary strengths

Two of Tata Power’s subsidiaries — Powerlinks Transmission, the 51:49 joint venture with Power Grid Corporation that operates the transmission line from the Tala hydroelectric project in Bhutan and North Delhi Power Ltd., the 51:49 joint venture with Delhi Vidyut Praday Nigam which is a distribution licensee in Delhi — have begun to contribute significantly to the consolidated financials.

In 2007-08, North Delhi Power’s post-tax earnings rose by 52 per cent to Rs 282 crore while revenues increased by 11 per cent to Rs 2,287 crore.

The company earned a hefty Rs 53 crore incentive by reducing aggregate technical and commercial losses in its licence area to 18.4 per cent, which is considerably lower than what was mandated. Similarly, Powerlinks turned in a net profit of Rs 58 crore on revenues of Rs 245 crore in 2007-08.

The two Indonesian coal companies chipped in with a handy dividend of more than Rs 300 crore ($75 million); they contributed about 17 per cent to the consolidated post-tax earnings.

The dividends will be useful to service the large debt incurred for the acquisition. Given the rising prices of thermal coal, Tata Power stands to gain significantly from its investment in the Indonesian companies financially.
Tripwire

The downside to our recommendation stems from possible delays in commissioning the projects that are under implementation and on the drawing board. Project schedules could go haywire if there is a delay in delivery of critical equipment, which is something not in the control of the company.

There is also the risk that given the rising interest cost regime worldwide, Tata Power will have to service costlier loans. About Rs 18,000 crore of the total capital requirement of Rs 24,000 crore over the next five years will be funded by debt, domestic and overseas.

The company may be forced to contract loans at a higher rate than what it had bargained for, leading to pressure on cash flows, especially in projects that will operate on a merchant basis.