Tata Power Company (TPC) reported an increase of 34% in net sales on standalone basis. This was mainly due to a higher realization rate. However, this rate increase was due to the pass-through of the higher fuel cost. This further resulted in lower EBITDA margin which declined 141 bps y-o-y to15%.
During Q1’09, power generation grew by just 1.9% y-o-y due to the lower PLF of hydro power stations on account of lower-than-average rainfall during this quarter.
We expect the generation from the hydro power stations to increase in Q2’09 as Mumbai receives a major portion of its monsoon rains during this period. Moreover, all other plants performed well.
Major subsidiaries such as NDPL, Power Link, and Tata Power Trading Company also continued to perform well during this quarter. Moreover, Bumi, Tata’s JV, reported a double-fold increase in its net profit.
In FY08, subsidiaries, JVs, and associates accounted for 46% of the total revenues and 18% of the net profit. We expect this contribution to increase in FY09 on the back of the good performances in Q1’09.
Tata Power acquired an 11.4% of the current issued share capital in Geodynamics Limited for approx A$ 44 million and is further planning for acquisitions in the power segment.
The company plans to increase its total power generation capacity by 5 times to 12.8 GW by FY13. Out of the additional capacity of 10.4 GW to be added in the coming years, nearly 5.8 GW is at an advanced stage of implementation and is proceeding as per schedule.
We value TPC’s 11.4% stake in Geodynamics at Rs7 per share. However, our current SOTP valuation does not provide any major change to our previous target price of Rs1,222.
As the stock has appreciated by almost 9% since our last report, the target price does not provide a substantial appreciation as compared to the current market price. Hence, we downgrade our rating from Buy to HOLD.