While the exact reasons for the sequential drop in profit were awaited at a late evening conference call, one analyst who did not want to be quoted said that prima facie the proportion of merchant sales seems to have dropped. In the first two quarters of this fiscal, the company’s merchant sales were higher than Street expectations, leading to earnings adjustments by some analysts.

The company is in the midst of a massive capacity expansion programme, with operational capacity expected to increase from 2.8 gigawatts to 8.2 gigawatts in fiscal 2013. According to Motilal Oswal Research, “Given that the entire capacity under construction has been contracted, returns will be capped. Of the aggregate commissioned capacity of 8.2 GW (gigawatts) till FY13, merchant will account for 200 MW." The company recently raised funds by issuing depository receipts and foreign currency convertible bonds (FCCBs) worth Rs3,000 crore. This is estimated to result in a dilution of around 10% in the company’s equity. Along with the internal cash generation in the coming three fiscal years, this should meet the equity funding requirement of the mentioned projects above.

There are other projects in the pipeline totalling 6.2 gigawatts, which are expected to be commissioned between FY13 and FY15. Fund raising for these projects, as and when it happens, will lead to further equity dilution.

Apart from the increase in capacity, the company’s earnings are also expected to rise owing to increased sales of coal. Motilal Oswal expects the contribution from the KPC/ Arutmin mines to rise to about 56% of consolidated profit in FY12, compared with 37% this year. It expects a profit of Rs2,757 crore in FY12, against Rs1,591 crore this year. But Tata Power’s shares have risen at a brisk pace in the past year and capture much of this already.

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