Tata Power: Fuel Cost Puts Margins Under Pressure

Despite robust growth in power generation, the country’s largest private sector power utility, Tata Power, has disappointed the investors with its September quarter results. The performance of its coal mines in Indonesia has acted like a drag on its consolidated numbers. The company’s consolidated revenue is Rs 7,699.77 crore, up by 22 per cent on a YoY basis and has reported a loss of Rs 83 crore as against loss of Rs 1,187.32 crore. 

The revenues grew mainly after the company added thermal capacities at its Maithon Project (1,050 MW) and Mundra UMPP (Unit I and II, total capacity 1,600 MW). The company has also commissioned the third unit of Mundra UMPP (800 MW) which has taken its total capacity as of date to 6,900 MW. On the back of the capacity additions, its power business revenues rose by 40 per cent to Rs 5,488.54 crore. The revenues also rose partially due to addition of more subscribers in Mumbai and better merchant realisations in its trading business. 

The coal business on the other hand disappointed as revenues declined by 5 per cent to Rs 2,056 crore. Its realisations also declined significantly from USD 84 per tonne in the September quarter last fiscal to USD 78.4 per tonne in the period under review. The company mined a total of 19.38 million tonnes of coal but sold only 15.45 million tonnes, which is down by 6 per cent on a YoY basis. The gap between production and sales was due to the problems in its equipments such as crusher and conveyer. The management has said that the equipments are now functioning normally and the sales volumes have picked up again in the December quarter. The fallen realisation however is a cause of concern as the coal business generated half of its PBIT margins in FY12. This fall has been very significant and therefore the result has been quite disappointing. 

During the quarter the company witnessed a 72 per cent jump in its cost of fuel. On the back of this surge its EBITDA margins declined by nearly 550 basis points to 20.40%. The drop in its margins is also on a sequential basis. We believe that the fuel costs have remained high mainly due to rupee depreciation. The Indonesian coal costs have shown some respite during the September quarter and the trend has continued. Since the rupee still remains at a high level, we expect its margin to remain under pressure even in the next quarter. 

Its net profit came under pressure due to its soaring finance cost which was Rs 623 crore during the quarter compared to Rs 331 crore in the September 2011 quarter and Rs 548 crore in the June 2012 quarter. 

Overall Tata Power failed to meet the street expectations of net profit of about Rs 275 crore due to higher fuel and finance costs. The company faces tariff-related issues in its Mundra UMPP where it is hoping for the early commissioning of its other two units as well. The management has said that with the remaining factors being the same, the company will incur loss of Rs 40 crore per month on the projects (Rs 480 crore per year) which currently is a big drag on its profit and loss statement. The company requires a tariff hike of 40 paise to recover all its costs on the Mundra Project and another 25 paise for reasonable returns. The company has filed a petition with the CERC to get this raise. CERC on the other hand is seeking responses from the power utilities and the same is expected on December 4. The case however is quite complicated as power utilities do not want to pay high for the power.