Bid Bye To Uncertainties - Tata Power Company

In uncertain times certainty provides a solace. That is the reason why we are recommending Tata Power Company (TPC) to our investors as our Choice Scrip. TPC is India's largest private sector utility with 2365 MW capacity. With almost assured revenue stream it seems to be the safe play in the current uncertain situation. In addition, other factors like consistent topline as well as bottomline growth and strong dividend payment history provide the solace. Further TPC has charted out aggressive growth plans for the addition of about 10,000 MW of generation capacity in the next five years and out of that financial closure for 5660 MW is already done. Out of this 5660 MW, 530 MW is expected to go on stream by March 2009 and the benefit of the same can be seen in the FY10. This will drive topline and volume growth in mid term. In addition, the stake acquired by TPC in Bumi mines (Indonesia) is not only expected to help the company integrate itself but its consolidated performance is also expected to get a boost. Now if we take a look at the valuations, with price to book value of 1.60x and the CMP of Rs 766.45 discounting its consolidated FY08 earnings by 19.80x, it may look a bit on the higher side. But we feel that with capacity addition and better expected performance from its subsidiaries, its consolidated performance is expected to be good. In addition, sizable amount of investments of Rs 3174 crore provide a cushion in a tight liquidity situation. As regards the business of the company, TPC earns consistent return on equity (RoE). What we want to suggest here is, along with confirmed revenue stream and increase total capacity to 3116 MW (including wind power) till March 2009 the FY10 results are expected to be better.

As regards the expansion plans, total cost for 5660 MW (to be commissioned till 2012) arrives at Rs 24120 crore. While Rs 18120 crore will be financed through debt Rs 6000 crore (Rs 2900 Internal accruals, Rs 1900 crore through issue of warrants and Rs 1200 through monetising its investments) will be funded through equity. Important point is even during current difficult situation the company managed to arrange the high amount of debt at comparatively good spread (200 bps less than PLR). Another factor is, it has an opportunity for some. As regards the 30 per cent stake in Bumi mines, it will not only solve the purpose of coal requirement but even provides a solace on the valuation front. Mines have reserves of 8132 MT and the value of TPC's 30 per cent stake (Including Debt) is valued at Rs 3358 crore resulting in per share value of Rs 144 per share.

As stated earlier, on the financial front the company has posted consistent growth in topline and bottomline in last few years. Although H1FY09 bottomline declined marginally to Rs 415 crore as compared to Rs 448 crore, it was on account of higher tax outgo. But as stated earlier, going ahead consolidated results are expected to be better. Although the dilution of equity on account of 17.75 lakh FCCB conversion and 1.04 crore warrants (at Rs 1352 per share) is one concern, given the current share price the conversion is unlikely. We recommend the investors to buy the scrip with a target price of Rs 900.