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Raghuvir Srinivasan

TATA Power shareholders can continue to hold the stock for now. The company had a forgettable fourth quarter and its performance in the whole year, 2004-05, was also not noteworthy.

Despite all-time high generation, turnover was depressed due to the lower tariffs ordered by the Maharashtra Electricity Regulatory Commission (MERC).

However, the company is gradually expanding its business outside the Mumbai licence area, both in generation and in distribution and trading of electricity, which augurs well for its long-term prospects.

The tariff order for this fiscal expected soon could provide near-term pointers for the company's performance.

Lost year

The financial year 2004-05 was a bad one for Tata Power due to the 10.1 per cent lower tariffs ordered by the MERC. Revenues took a direct hit because of this, falling by 8.4 per cent to Rs 3,655 crore. The period also coincided with rising fuel costs; the company uses a mix of fuel oil and coal, both of which saw a sustained rise in prices. Operating margins fell by 6 percentage points for the year to 24 per cent despite the company's tight control over costs.

The fourth quarter was the worst as operating margins fell by over 11 percentage points and the bottomline showed growth, thanks only to extraordinary income from the sale of investments.

In fact, the company may have reported a fall in profit for 2004-05 but for the support from extraordinary income, mainly from the sale of the Wadi generation plant and the equity stake in Tata Petrodyne.

Clearly, regulatory guidelines on tariffs have had a deleterious impact on the company's financial performance. The impact could have been worse if not for the cost control efforts of Tata Power. While employee costs fell 19 per cent for the year, interest charge was down a sharp 33 per cent.

Diversifying risks

Tata Power has consciously focussed on diversification, both in terms of business and geographies in the last couple of years.

The 120-MW expansion of the Jojobera plant is due for commissioning in October on schedule.

This will be a merchant plant, which will sell a part of its generation to the Jharkhand State Electricity Board and trade the rest to other buyers.

Besides this, Tata Power has formed a 74:26 joint venture with Damodar Valley Corporation for setting up the 1,000-mega watt Maithon Right Bank project. The company is also examining the possibility of setting up a 1,000-mega watt plant in Bangladesh.

The distribution foray in Delhi through the subsidiary company, North Delhi Power Ltd., has proved successful with the utility succeeding in reducing the aggregate technical and commercial losses to 34 per cent, much below the targeted level of 40.85 per cent in 2004-05.

This has encouraged Tata Power to consider a bid for the distribution circles up for privatisation in Mangalore.

The trading business, Tata Power Trading, which received its licence barely a year ago, is using the power crisis in Maharashtra to its advantage by sourcing power from the north-east and supplying it to Maharashtra.

Of course, both volumes and margins are low presently but there is little doubt that the business holds a lot of promise for the future.

Tariff order for 2005-06

The MERC will be making its tariff order for this fiscal by the end of July, based on the submissions made by Tata Power.

It is difficult to speculate on what the outcome could be but if the general trend of regulators is anything to go by, then an order prescribing lower tariffs is more likely to happen.

This would present a tremendous challenge to Tata Power as it is already doing its best on cost-control to protect margins.

The nature of the tariff order may well determine the future course of the Tata Power stock.

The proposed sale of the broadband business may keep it buoyant in the near term due to the boost that it would give to revenues and earnings. But the medium-term price movements would be dictated by the tariff order.

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