Tata Power Equity Research

Date of Research – 21 January 2016

Price – Rs. 61.35

About the Company

Founded in 1915, Tata Power Company Limited (“Tata Power” or the “Company”) is India’s largest integrated power company with a significant international presence. Tata Power’s operations include power generation, transmission and distribution, and exploring various renewable sources of energy in India and globally. The Company has a significant presence in the wind, solar, hydro and geothermal energy space.

Tata Power has an installed generation capacity of 6,099 MW; and 1,085 circuit kilometers of transmission network in Mumbai area. It serves central and western railways, Mumbai port, refineries, textile mills, fertilizer factories, municipal corporation water pumping plants, and other industries and commercial and residential complexes.

Tata Power operates in various successful public-private partnerships in generation, transmission and distribution in India namely ‘Tata Power Delhi Distribution Limited’ with Delhi vidyut board for distribution in North Delhi, ‘Powerlinks Transmission Ltd.’ with Power Grid Corporation of India Ltd. for evacuation of Power from Tala hydro plant in Bhutan to Delhi and ‘Maithon Power Ltd.’ with Damodar Valley Corporation for a 1050 MW Mega Power Project at Jharkhand.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations33,025.4335,648.7034,366.8537,480.20 27,897.72 
Expenses26,393.0927,942.2527,426.3728,469.59 22,051.02  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)6,632.347,706.456,940.489,010.61 5,846.70  
Depreciation2,051.692,729.622,174.212,376.39 1,988.59
Finance Costs2,635.533,439.903,699.273,476.53 3,113.97  
Other income181.56(561.86)416.7478.96 202.22  
Exceptional items850.001,299.98 1,260.91  
PBT1,276.68975.071,483.741,936.67 (314.55) 
Tax1,177.961,008.381,074.92869.28 (45.82) 
PAT (before Minority Interest and share of Associates)98.72(33.31)408.821,067.39 (268.73) 
Profit/ (loss) attributable to Minority Interest208.07272.03289.37255.66– 
Share of profit / (loss) of Associates(23.92)(45.37)(48.38)(61.62) (1,217.29) 
Consolidated Profit / (Loss) for the year(85.43)(259.97)167.83873.35 948.56  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio20.0821.6220.2024.04 20.96 
Net Profit Margin Ratio0.30(0.09)1.192.85 (0.96) 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital237.29237.29237.29270.48 270.48 
Reserves & Surplus11,011.4110,501.1910,473.2912,271.5712,843.44 
Net worth (shareholders funds)11,248.7010,738.4810,710.5812,542.0513,113.92 
Unsecured Perpetual Securities1,500.001,500.001,500.001,500.001,500.00 
Special Appropriation Towards Project Cost533.61533.61533.61533.61533.61 
Statutory Reserves617.77604.23613.23623.23644.23 
Minority Interest1,631.272,064.602,273.312,492.592,581.38 
Capital Grant9.398.918.828.307.80 
Service Line Contributions From Consumers401.32450.56534.83611.70698.02 
Long term borrowings29,733.1131,599.3430,469.9432,618.3834,296.81 
Current liabilities13,207.2716,642.5721,726.7221,111.1220,621.63 
Other long term liabilities and provisions2,219.012,113.701,889.342,000.502,221.61 
Deferred Tax Liabilities647.051,025.411,137.881,401.371,487.49 
Total Liabilities61,748.5067,281.4171,398.2675,442.8577,706.50 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets35,468.2737,986.7240,450.2341,763.8246,069.52 
Noncurrent Investments2,645.422,642.712,678.722,732.572,885.49 
Current assets11,470.0912,150.1213,360.8814,916.3615,874.34 
Long term advances and other noncurrent assets7,312.018,752.848,561.439,398.498,188.81 
Deferred Tax Assets8.3124.8814.965.8511.68 
Goodwill on consolidation (net)4,844.405,724.146,332.046,625.764,676.66 
Total assets61,748.5067,281.4171,398.2675,442.8577,706.50 

Efficiency Analysis

 
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE12.5014.9417.7314.5618.02 
ROE / RONW(9.67)(0.80)(2.43)1.348.14 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)33,025.4335,648.7034,366.8537,480.20 27,897.72 
Growth (%)27.01 %7.94 %(3.60 %)9.06 % (25.57 %) 
PAT (Rs. Cr.)98.72(33.31)408.821,067.39 (268.73) 
Growth (%)110.20 %(133.74 %)1,327.32 %161.09 % (125.18 %) 
Earnings Per Share – Basic (Rs. )(1.23)(1.61)0.172.73 2.34 
Earning Per Share – Diluted (Rs. )(1.23)(1.61)0.172.73 2.34 
Price to Earnings446.1823.68 34.49 

Dividend History

The Company has maintained an average dividend yield of 1.33 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Tata Power’s average current ratio over the last 5 financial years has been 0.74 times.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Tata Power’s average long term debt to equity ratio over the last 5 financial years has been 2.30 times which indicates that the Company is vulnerable to economic slowdowns such as the one we have been witnessing over the last few years.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Tata Power’s average interest coverage ratio over the last 5 financial years has been 2.54 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Tata Power reported a promoter holding of 33.02 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 50.98 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.