THE Tata Power COMPANY LIMITED

A Financial Statement Analysis

CHAIRMAN RATAN N. TATA

MANAGING DIRECTOR PRASAD R. MENON

EXECUTIVE DIRECTOR S. RAMAKRISHNAN

S PADMANABHAN

B. AGRAWALA

LISTED IN LUXEMBOURG

BSE

NSE

INDUSTRY Power Generation And Supply

Submitted By

Aditya Ganguli018/46

Ankit Sukhija052/46

Chirag Jain 097/46

Company Background

Tata Power Company Limited (TPC), India's largest integrated Electric Power Utility in private sector with a reputation for reliability, incorporated in the year 1919 at Mumbai. TPC pioneered the generation of electricity in India nine decades ago. The core business of Tata Power Company is to generate, transmit and distribute electricity. The Company operates in two business segments: Power and Other. The Power segment is engaged in generation, transmission and distribution of electricity. The other segment deals with electronic equipment, project consultancy.

 Tata Power acquired 100% equity stake in Tata Power Trading Co. Pvt Ltd in the year 2004. The Christened Tata Power Trading Company was incorporated in the year as a subsidiary of the company. The company received CII EXIM Bank Award 2005 for 'Certificate for Strong Commitment to Excel'. During the period of 2006, the company joined hands with Siemens. The company signed a joint venture agreement with Tata Steel to set up a Captive Power plants in Chattisgarh, Orissa and Jharkhand. The company received seven licenses from the Gvt of India, Ministry of Commerce and Industry, Dept of Industrial Policy & Promotion for its Strategic Electronics Division (Tata Power SED).

 In the year 2007, TPC has signed a MoU with the Government of Chhattisgarh for the setting up of a 1000 MW coal fired mega power plant in the State. The company has roped in Korea-based Doosan Heavy Industries and Construction Ltd for supercritical boilers for its Mundra ultra mega power project. The acquisition of Coastal Gujarat Power Ltd was med by the company and a Special Purpose Vehicle (SPV) formed for Mundra Ultra Mega Power Project (UMPP).

 Recognising the steady and stable performance in generating quality and reliable energy, the Central Electricity Authority has awarded Tata Power's Bhira Hydro generation facility with the Silver Shield award for the meritorious performance in March 2008. Tata Power announced in September of the year 2008, it would acquire a 11.4 per cent stake in Geodynamics Ltd, an Australian company specialising in geothermal energy, for Rs 1650 million.

Tata Power is surging ahead, lighting up lives through its activities from its inception. The challenge of fulfilling the ever growing needs of power has been met by Tata Power through efficient generation, transmission, distribution and constant upgrading of its technology in every aspect.

Power Sector in India

India consumes 3.4% of global energy. The Indian power industry is growing at a rapid pace. The Annual demand is increasing by 3.6% over the last 30 years. There is surging demand from domestic and industrial sectors.

The total power generation in the country during FY09 was 723.55 Billion Units (BUs) as against the target of 774.34 BUs, about 6% below target. The installed generation capacity in the country, as on 31st

March, 2009 was 147,965 MW. The primary source of fuel for power generation in India is still coal.

To achieve the Eleventh Plan targets, India needs over 65.86 GW of generation capacity addition by 2012. If this is to be achieved, it would need multiple initiatives in generation, transmission and distribution. The steady rise in demand for power as a result of economic growth is expected to present the Company with a number of opportunities.

The overall demand is expected to be touching 950,000 MW by 2030. For the Indian economy to grow at 9% annually, additional capacity of 60 GW must be added every five years. This requires approx. Rs 5000 billion in investment every five years. The domestic sector is expected to cross 29% by 2011-12; industrial sector will remain almost stagnant. The Government promise of 100% electricity to domestic users will push up consumption. Government policies and foreign investment in the sector will aim at bridging the huge gap between supply and demand of electricity in India.

To expedite the target growth of power generation, the Government of India has identified the development of Ultra Mega Power Projects (UMPPs) as a thrust area. The central idea of the UMPP is to set up generation capacity on a large scale and reduce the development time of the project with the Government arranging land and all key approvals for the project. So far, four such projects of 4,000 MW capacities each have been awarded and more are planned. The Company has won the Mundra UMPP.

The State Electricity Boards (SEBs) are main agencies for the generation and supply of electricity. Private investments in the Power Sector have been allowed since 1991, and therefore there is increased participation of private and global players.

Though 82.4% of villages are electrified, less than 60% of households consume electricity. Thus the per capita consumption of electricity is the lowest in India. Industry and Agriculture are the two main sectors that consume power. But the power sector in India faces many roadblocks like inefficient distribution systems, low capacity utilization and poor maintenance.

Current Industry Outlook

India's power generation recorded a 7% growth in June 2009 compared with 2.36% in June 2008. Thermal power generation recorded 13% growth in June 2009 compared with 2% increased recorded in last year. However hydro and nuclear power generation recorded 5.62% and 2.87% negative growth rate in June 2009 respectively compared with June 2008.

India's peak power demand grew by 3.8% in April 2009, but the pace of growth accelerated to 4.1% in May 2009 and to 6.5% in June 2009. To address the rising demand and sluggish capacity additions, the government indicated that it has initiated coordinated operation and maintenance of hydro, thermal, nuclear and gas based power stations to optimally utilize the existing generation capacity. Further, it encourages use of liquid fuel in respect of unutilized capacity of gas-based stations. In addition, the ministry is tapping surplus power from captive power plants. Also, to bridge the gap between requirement of coal and its availability from the domestic sources, coal imports are made.

The all-India power requirement was 111066 million units (MU) as against the availability of 95722 MU, which resulted in shortage of 15344 MU or recorded 13.8% deficit in June 2009.

All India power capacity addition target was 3041.50 MW in June 2009, as against which the country added mere 931.50 MW. Thermal capacity addition was 892.50 MW against 2991.50 MW planned while and hydro capacity addition was 39 MW against 50 MW targeted capacity for the month.

Union Budget 2009-10 has been mildly positive for the power sector. The budget has provided for extension of sunset clause for tax holiday under section 80-IA of the Income tax act available for power generating unit as well as transmission and distribution companies upto March 31, 2011.

Given the fact of extension of benefits upto March 31, 2011 that is the peak period where significantly large planned generation capacity is scheduled to commence operation is a welcome measure for the power sector. However the budget has not provided for other core demands of the industry such as refinancing of existing rupee loans ECB should be allowed for infrastructure sector as well as withholding tax exemption etc. Though increase in MAT is to affect the cash flow of the companies especially the infra developers, on overall basis the Union Budget 2009-10 is a positive one for the power sector.

Abridged Balance Sheet

Year Mar 09  Mar 08 

Mar 07  Mar 06  Mar 05 

FUNDS EMPLOYED:

Share Capital (incl. Warrants)

2214.4 2817.1 1979.2 1979.2 1979.2

Reserves and Surplus 78884.5 72375.1

52594.2 53577.2 49385.5

Special appropriation for project cost

5336.1 5336.1 5336.1 5336.1 5336.1

Capital contribution from consumers

488.6 460.8 421.6 418.1 418.1

Secured Loans 39317.1 23310.9

13543.0 9460.0 10590.7

Unsecured Loans 12664.9 7061.8 22790.6 18090.0 18009.4

Net Deferred Tax Liability 1144.3 189.4 57.0 -161.5 113.2

Total Funds Employed 140049.9 111551.2

96721.7 83106.4 80078.0

APPLICATION OF FUNDS :

Fixed Assets (Net Block) 51905.4 30054.9

30303.1 30030.2 28084.7

Capital Work in Progress 76116.0 1 6817.4

7810.5 2118.1 4376.5

Investments 54434.7 44300.0

35701.5 34121.7 35029.2

Current Assets, Loans & Advances

Inventories 6441.4 4736.1 3964.2 4422.6 2970.3

Sundry Debtors 15879.7 14145.2

14766.3 10582.3 6966.3

Cash and Bank 455.0 287.0 13677.2 9905.5 9796.0

Loans and Advances 24035.3 19586.8

8015.6 4820.0 5503.6

Total Current Assets 46811.4 38755.1

40423.3 29730.4 25236.2

Current Liabilities and Provisions

Current Liabilities 14193.3 12538.7

11262.6 7318.1 7068.7

Provisions 6519.9 5854.4 6315.8 5892.0 5807.0

Total Current Liabilities 20713.2 18393.1

17578.4 13210.1 12875.7

Net Current Assets 26098.2 20362.0

22844.9 16520.3 12360.5

Misc Expenses not written off

0 16.9 61.7 154.6 227.1

Total Application of funds

140049.9 111551.2

96721.7 83106.4 80078.0

* All figures in Rs million

Profit & Loss Statement

Year Mar 09 Mar 08 Mar 07 Mar 06 Mar 05

INCOME :

 Revenue 72362.3 59159.1 47153.2 45322.4 3927.14

Other Income 6323.5 4978.5 3439.9 327.53 390.43

Total Income 78685.8

64137.6

50593.1

4859.77

4317.57

EXPENDITURE :

Cost of Power purchased 4935.0 5488.7 6645.8 5832.0 4157.0

Fuel Cost 48134.7 37149.9 27089.1 23965.1 18639.8

Generation, distribution and other expenses

7883.2 7154.1 6183.9 7189.9 6980.4

Depreciation 3288.5 2905.0 2919.2 2783.4 3596.2

Interest and other charges 3277.6 1738.7 1895.0 1652.8 2214.4

Total Expenditure 67519.0

54436.4

44733.0

41123.2

35587.8

Profit before Tax and statutory appropriations

11166.8 9701.2 5860.1 7474.5 7587.9

Current Tax(Net) 921.8 810.1 -1371.2 1570.5 1584.2

Deferred Tax(Net) 954.9 1324.0 218.5 -274.7 485.5

Fringe Benefit Tax 54.0 50.9 38.8 69.4 0

Provision for Wealth Tax(Net) 14.1 8.8 6.0 3.9 4.6

Statutory Appropriations -453.0 585.9 228.3 352.9 -37.3

Distributable Profits 9675.0 8113.1 6739.7 5752.5 5550.9

Dividend per share (%) 115 105 95 85 75

Basic Earnings Per Share(EPS) (Rs/share)

43.69 38.64 34.02 29.03 28.02

Diluted EPS (Rs/ share) 43.69 141.56 32.09 27.34 27.84

* All figures in Rs million unless otherwise stated

Cash Flow Statement

Mar-09 Mar-08 Mar-07

Mar-06

Mar-05

Cash and Cash Equivalents at Beginning of the year 287

10027.1

9740.5 9864.9 519

Net Cash from Operating Activities 6486.1 112625 4367 2968.6 4440.9

Net Cash Used in Investing Activities -22205.

2

-25411.

4

-9465.

6 1444.6-

3080.8

Net Cash Used in Financing Activities 15887.1 4408.8

5385.2

-4537.6 7985.8

Net Inc/(Dec) in Cash and Cash Equivalent 168 -9740.1 286.6 -124.4 9345.9

Cash and Cash Equivalents at End of the year 455 287

10027.1 9740.5 9864.9

* All figures in Rs million unless otherwise stated

Select Accounting Policies

(a) Depreciation/Amortisation:

(i) Depreciation for the year in respect of assets relating to the electricity business of the Company as Licensee has been provided on straight line method in terms of the repealed Electricity (Supply) Act, 1948

(ii) Depreciation for the year in respect of assets relating to the electricity business of the Company as other than a Licensee has been provided on straight line method.

(iii) In respect of assets relating to the other business of the Company, depreciation has been provided for on written down value basis at the rates and in the manner prescribed in Schedule XIV to the Companies Act, 1956, except in the case of technical know-how which is written off on a straight line basis over a period of six years.

(iv) Assets costing less than Rs.5000/- are depreciated at the rate of 100%.

(b) Investments:

Long term investments are carried at cost, less provision for diminution other than temporary, if any, in the value of such investments. Current investments are carried at lower of cost and fair value.

(c) Inventories:

Inventories of stores, spare parts, fuel and loose tools are valued at or below cost. Cost is ascertained on weighted average basis. Work-in-progress and property under development are valued at lower of cost and net realisable value.

(d) Research and Development Expenses:

Research and Development costs of a revenue nature are charged as an expense in the year in which these are incurred.

(e) Intangible Assets:

Intangible assets are recognized only if it is probable that the future economic benefits that are attributable to the asset will flow to the Company and the cost of the asset can be measured reliably.

(f) Warranty Expenses:

Anticipated product warranty costs for the period of warranty are provided for in the year of sale. Other warranty obligations are accounted for as and when claims are admitted.

(g) Revenue Recognition:

(i) Revenue from Power Supply and Transmission Charges are accounted for on the basis of billings to consumers/State Transmission Utility and inclusive of Fuel Adjustment Charges and includes unbilled revenues accrued up to the end of the accounting year.

(ii) The Company determines surplus/deficit (i.e. excess/shortfall of/in aggregate gain over Return on Equity entitlement) for the year in respect of its Licensed Area operations (i.e. Generation, Transmission and Distribution) based on the principles laid down under the (Terms and Conditions of Tariff) Regulation, 2005.

(iii) Delayed payment charges and interest on delayed payments for power supply are recognised, on grounds of prudence, as and when recovered.

(h) Accounting for Contracts:

Income on contracts in respect of Transmission EPC, Strategic Electronics business and Project Management Services are accounted on 'Percentage of Completion' basis measured by the proportion that cost incurred up to the reporting date bear to the estimated total cost of the contract.

(i) Expenditure on Amalgamation:

The expenditure incurred is amortised over a period of five years.

(j) Provision, Contingent Liabilities and Contingent Assets:

Provisions (excluding retirement benefits) are not discounted to its present value and are determined based on best estimate required to settle the obligation at the Balance Sheet date. These are reviewed at each Balance Sheet date and adjusted to reflect the current best estimates. Contingent Liabilities are not recognised in the financial statements. A Contingent Asset is neither recognised nor disclosed in the financial statements.

Overall interpretation of financial statements

Opening Cash balance is at an all time low for the year 2008-09. This is 2.86% of last year’s figure.

Net Cash from operating activities are also 57% of last year’s values. But the value is a little higher than the average value over the last 5 years (5870 million).

Net profit before tax has started showing an uptrend in the last two years after falling continuously for 2 years. The value has risen by 15% as compared to 2007-08

Net Interest paid has shown a huge rise over the last year. Overall the net Interest for 2008-09 is more than the aggregate interest for 2004-2008. In comparison over the last year, the net Interest paid has risen by more than 204%

There has been steady and increasing investment in fixed assets. This highlights that the company is growing organically. The amount invested in purchase of fixed assets has risen by 23.76% as compared to last year. This is one of the biggest sources of outflow of cash for the year.

There has been consistent sale and purchase of investments, with purchases exceeding sales for 4 out of last 5 years.

Investing Activities have been the major source of outflow of cash. The cash inflow has been provided by operating and financing activities contributing equivalent of 29.21% and 71.54% (of Investing outflow) respectively. Long Term borrowings are the major source of financing inflow (99.86%)

In the last two years, the cash & cash equivalents closing balance has been very low as compared to the previous years. Although it rose by 58.53% in the year 2008-09 the value is still merely 4.5% of 2007-08 figures.

During FY09, the total income at Rs. 78685.8 million was higher by 22.68% as compared to Rs. 64137.6 million in the previous year.

Other income of Rs. 6323.5 million (previous year Rs. 4978.5 million), included in the total income, is higher predominantly on account of higher dividend received and gain on exchange (net) during the year.

Operating income at Rs. 72362.3 million for the year was higher by 22.32% as compared to Rs. 59159.1 million in the previous year. This is higher mainly owing to new tariff approved by the Regulator in Mumbai Licensed Area, additional power generated from new plants commissioned during the year, such as Haldia Power Plant and new wind farms and higher volume sold in Jojobera and Belgaum in the current year.

The Operating Profit went up by 21.8% due to operational efficiencies and higher volume of business.

The cost of power purchased was lower at Rs. 4935.0 million compared to Rs. 5488.7 million during the previous year mainly due to higher capacity allocation to Tata Power-Distribution in Mumbai Licensed Area coupled with the fact that during the previous year, the Company purchased power on behalf of all licensees as directed by MERC. The increase in the fuel cost from Rs. 37149.9 million to Rs. 48134.7 million is mainly due to steep increase in prices domestically and internationally.

Other operating expenses were higher at Rs. 7883.2 million in FY09 (Rs. 7154.1 million in the previous year). The increase is attributable to the existing units at the beginning of the year and the new units commissioned during the year on account of higher employee costs, higher repairs and maintenance cost and higher transmission charges (as per MERC order).

Depreciation was higher at Rs. 3288.5 million in FY09 (Rs. 2905.0 million in the previous year) mainly on account of commissioning during the year of Trombay 250 MW Unit 8 Power Plant, Captive coal berth, Haldia Power Plant, new wind farms and other assets.

Interest and finance charges were higher at Rs. 3277.6 million (Rs. 1738.7 million in the previous year) mainly on account of higher capitalisation, increased borrowings and reset of interest at a higher rate.

Tax was higher at Rs. 1944.8 million (Rs.1002.2 million in the previous year) mainly on account of higher profit before tax during the year and higher deferred tax on account of new wind capitalisation.

Thus, the Company reported the highest ever PAT of Rs. 9222.0 million, as against Rs. 8699.0 million for the previous year, a growth of 6%, the highest so far.

Net Profit after Tax and Statutory Appropriations stood at Rs. 9675.0 million as against Rs. 8113.1 million for the previous year, an increase of 19.25%.

During the year, the net addition of Rs. 25036.1 million to the gross block was mainly on account of capitalisation of Trombay 250 MW Unit 8 Power Plant, Captive coal berth, Haldia Power Plant and new wind farms. The

net current assets as on 31st March, 2009 were higher at Rs. 26098.2 million as compared to Rs. 20362.0 million in the previous year.

Borrowings at Rs. 51982.0 million as at 31st March, 2009 were higher by Rs. 21609.3 million as compared to previous year mainly on account of issue of non-convertible debentures, term loan from IDBI Bank Limited , issue of commercial papers and short term borrowings from banks.

Net worth of the Company of Rs. 71851.6 million as at 31st March, 2009 was higher by Rs. 8223.4 million as compared to previous year primarily on account of retained profits and increase in Capital Reserve due to forfeiture of initial amount paid on allotment of Convertible Warrants to Tata Sons Limited.

Dividend recommended at Rs. 11.50 per share, the highest ever so far.

Higher dividend received during the year and gain on exchange (net) resulted in higher other income of Rs. 6323.5 million (previous year Rs. 4978.5 million).

Earnings per share (Basic) showed an increase of 13.07% to Rs. 43.69 as against Rs. 38.64 in the previous year.

Ratio Analysis for the company

Earnings per share (EPS)

Profitability Ratios 2004-05 2005-06

2006-07

2007-08

2008-09

Operating Profit Margin (%) 23.08 18.46 14.26 15.56 15.49

Profit Before Interest And Tax Margin (%) 13.41 11.90 7.79 10.38 10.63

Gross Profit Margin (%) 21.36 18.25 16.27 10.64 10.96

Operating Profit margin has taken a hit over the years. The company average for the last 5 years stands at 17.37%. The current year performance is lower than last year and considerably lesser than the company average.

The firm has been able to maintain the gross margins above last year levels, but it has substantially decreased over the last five years.

Overall Performance 2004-05 2005-06

2006-07

2007-08

2008-09

ROE (RONW) 15 14 15 13 14

ROCE 14 13 12 12 11

ROA 256.29 277.84 302.42 -1.15 -1.15

ROE is a good measure of performance from shareholders’ perspective. ROE for the firm has been oscillating in the 13-15% range for the last 5 years. The performance of the company (in terms of ROE) has improved in 2008-09 as compared to 2007-08. The improved profitability has helped the company in achieving an increase return on net worth. Both ROCE and RONW are considerably higher than the sector average.

Turnover Ratios 2004-05 2005-06

2006-07

2007-08

2008-09

Inventory turnover ratio 13.68 10.68 13.25 18.70 15.49

Fixed Asset turnover ratio 1.17 1.41 1.40 0.91 0.81

Total Asset turnover ratio 0.49 0.55 0.51 0.53 0.52

Debtors turnover ratio 5.55 5.20 3.88 4.09 4.83

Number of Days In Working Capital

112.46 131.89 166.79 122.89 123.79

Inventory turnover ratio has decreased from last year, but is above the average over the five years. This is higher than the industry average of 14.2.

Fixed Asset turnover ratio has been consistently decreasing over the past 5 years (44.44% overall), but this is also due to the fact that the company is rapidly adding assets which are yet to be utilized. The net block, including capital work-in-progress has increased by 27% over the year. The ratio is still much higher than the industry average of 0.47 and hence it shows the superiority of the firm over many others.

Debtors turnover ratio has improved considerably over the last year (18% rise), but it is much lower than the 2004-05 figures. But the value is considerably better than the industry average of 4.65.

Solvency Ratios 2004-05 2005-06

2006-07

2007-08

2008-09

Interest Coverage 3.73 4.86 4.03 4.63 3.33

Long Term Debt Equity Ratio 0.55 0.49 0.51 0.34 0.50

Total Debt Equity Ratio 0.56 0.50 0.60 0.38 0.60

Interest Coverage ratio has shown a steady decline over the past few years, but it is still higher than the industry average in India (2.96). A major reason for the decline has been the increasing interest charges for the company. But still the company is in a good position to service the interests on its loans. Also since the company is planning to borrow more long term loans in future for expansion, the interest charges are bound to increase.

Debt equity ratio (long term as well as total) had decreased in 2007-08 but this year it has come back to 2006-07 levels. The industry average stands at 0.75 for long term debt ratio.

Liquidity Ratios 2004-05 2005-06

2006-07

2007-08

2008-09

Current Ratio 1.86 2.18 2.22 1.78 1.64

Quick Ratio 1.64 1.85 2.00 1.75 1.77

Both current ratio as well as quick ratio is much higher than 1. This signifies that the company may have a good liquidity, and cash inflow precedes cash outflow. But this also shows that a part of current assets is being financed from long-term sources. Such assets will mature earlier than the maturity of long term funds. But the net cash and cash equivalents is a very small component of the current assets of the company for 2008-09.

Quarterly financial results

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Revenue 13505.6 14194 15863

20261.3

19588.8

17788.7

14723.5

20156.2

Other Income 1404 368.2 2625 872 1884.3 460 3107.2 1075.8

Total Income

14909.6

14562.2 18488

21133.3

21473.1

18248.7

17830.7 21232

Expenditure 11601.1 12217 15600

17943.3

17705.1

16017.2

12795.5

14951.3

Interest 414 385.5 319 521.6 680.9 951.5 903.9 1176.5

PBT 2894.5 1959.7 2569 2668.4 3087.1 1260 4131.3 5104.2

Provision(Tax) 320.2 -13.1 318 762.9 467.8 109.2 604.9 1333.4

PAT 2574.3 1972.6 2251 1905.5 2619.3 1150.8 3526.4 3770.8

Paid-up Equity 2078.1 2181 2214.1 2208.7 2214.1 2214.1 2214.1 2220.3

*All Figures in Rs million

Recent Quarterly Performance

In Q3FY09, Tata Power reported a topline of Rs. 17790 million, up 25% y-o-y. This was primarily due to an increase of about 21.7% in the sale price per unit of electricity due to higher fuel and power purchase costs y-o-y.

On a q-o-q basis, net sales were down 9%. Lower-than-estimated fuel price increases and power purchases resulted in lower tariffs (effective) during the quarter in the Mumbai licence area. There was a 17.6% fall in the price per unit of electricity sold. Due to a delay in the commissioning of generation assets (at Trombay and Jamshedpur) and a planned shutdown of unit 7 at Trombay, the number of units sold by Tata Power increased only marginally in Q3FY09. The company’s hydro power station recorded higher generation of 39 million units, up by 14.98%. Belgaum Power Station also reported increase in generation to 129 million units due to higher demand by KPTCL as Karnataka had a poor monsoon.

Part of the reason for the fall in realisation in the quarter, apart from the fall in fuel costs, is that the proportion of sales in outside the license area is up (that is sold at a lower rate) this quarter.

Other income includes Rs. 209 million of forex gain on the net foreign exchange asset exposure, which has helped boost the bottom-line.

Other income was down 75% q-o-q. Q2FY09 witnessed a significant jump in other income on account of receipt of Rs. 75 million in dividends from its subsidiaries and exchange gain of Rs. 767 million.

Increase in cost of fuel, staff cost and other expenditure (higher repair and maintenance works and a one-off additional business development expense cumulatively amounting to about Rs. 170 million) caused the operating margins to dip.

On a y-o-y basis, Expenditure increased 25% owing to staff cost that jumped 72% and high Fuel and power purchase costs.

Interest costs jumped 146.8% y-o-y and 39.7% q-o-q to Rs. 951.5 million. Net interest costs increased y-o-y due to:

Interest expense of Rs. 325.3 million due to debt rose for funding the equity contribution in project SPVs

Interest expenses of Rs. 63.4 million on the recently commissioned power plant at Haldia and windmills

Interest resets of Rs. 64.1 million (Rs. 46.6 million is recoverable through tariffs).

Fall in operating margins, higher interest costs and tax outgo resulted in a 42% fall in net profit to Rs. 1151 million y-o-y. Also, the results are not strictly comparable on a y-o-y basis due to the change in accounting

policy wherein regulatory adjustments are being made on a quarterly basis compared to the previous policy of annual adjustment.

On a like-to-like comparison, Tata Power’s PAT for Q3FY08 would have been lower by Rs. 650 million translating into a 13% fall in profitability in Q3FY09 versus reported 42%.

In Q4FY09, Tata Power reported a topline of Rs. 14723.5 million, down 8% y-o-y. This was primarily due to a decrease in the sale price of fuel and lower generation in the Mumbai License Area.

Realizations and sales were below expectations due to a sharply lower proportion of purchased power during the quarter.

On a q-o-q basis, net sales were down 17.2% due to a fall in fuel costs and lower generation during the quarter in the Mumbai licence area.

Other income, which includes other operating income, increased 18.36% y-o-y. This includes extraordinary items like forex gain and net profit of Rs. 2557.8 million from sale of long term investments (including sale of stake in Tata Teleservices).

Overall Operating Profit improved due to lower fuel costs and decrease in cost of power purchased. Operating profit was also boosted due to higher than expected realizations from merchant power sales. In March, the merchant generation was about 10% of overall generation outside the MLA. Tata Power realized rates between Rs. 6 – 7 per unit for power traded from Haldia and Unit 8. Tata Power reported PAT increase of 56.65% y-o-y and 206% q-o-q.

Interest cost jumped sharply by 184% y-o-y to Rs. 904 million (down 5% q-o-q) during the quarter due to commissioning of new units and a sharp increase in borrowings in order to fund the company’s investments in SPVs, as also a general increase in borrowing costs.

Tata Power’s PAT went up 57% y-o-y due to increase in other income and forex gains.

Tata Power reported total income of Rs. 21232 million in Q1FY10, up 0.5% y-o-y and 18.9% q-o-q. Operating margins increased due to the inclusion of Rs. 2324 million as part of revenue which pertains to previous years due to MERC tariff orders and judgment of ATE received during this financial year. Excluding the impact of this, margins increased to 20.6% on the back of lower cost of fuel and lower cost of power purchased.

In Q1FY10, Tata Power reported a topline of Rs. 20156.2 million, down 0.5% y-o-y and up 36.8% q-o-q. This includes an amount of Rs. 2324 million pertaining to previous years. Thus, based on a like by like comparison, revenue in Q1FY10 is at Rs. 1783 million, lower by 12% y-o-y. This fall is mainly explained by a decrease in fuel cost and thus a corresponding decrease in the price of power per unit sold.

On a q-o-q basis, the increase in revenue is higher due to the Rs. 2320 million of one-time adjustment to revenue, an increase in the number of units sold and a marginal increase in the selling price per unit sold.

Other income increased 23% y-o-y and was down 65.4% q-o-q at Rs. 1075.8 million. This includes forex gain of Rs. 243.4 million in Q1FY10 compared to forex gain of Rs. 388.9 million in Q1FY09 as well as dividend on investments. On a q-o-q basis, other income is down because Q4FY09 contains net profit of Rs. 2557.8 million from sale of long term investments (including sale of stake in Tata Teleservices).

Overall, PBT improved due to lower fuel costs and decrease in cost of power purchased. The fall in power purchased was due to lower demand from the MLA distributors and third party sales are no longer to be routed via Tata Power. Fuel cost are lower partly due to the lower cost of coal, gas and oil compared to the previous year and partly due to the shutdown of Unit 4 at Trombay which was based on high cost fuel oil, now replaced by Unit 8 (based on imported coal). Operating profit was also boosted due to higher realizations from merchant power sales.

Interest cost jumped sharply by 125.6% y-o-y and 30.2% q-o-q to Rs. 1177 million during the quarter due to commissioning of new units and a sharp increase in borrowings in order to fund the company’s capex plans and investments in SPVs, as also a general increase in borrowing costs.

Tata Power reported a PAT of Rs. 3770.8 million, up 97.8% y-o-y and up 6.9% q-o-q buoyed by higher generation, lower fuel costs, receipt of previous year revenue and impact of FY09 capacity expansion. However, on a y-o-y basis adjusting for the one time item of Rs. 2320 million, PAT increased by 22.7% to about Rs. 2330 million.

Competitor Analysis

The two main competitors of Tata Power are National Thermal Power Corporation (NTPC) and Reliance Infrastructure.

Sales figure comparison

In terms of sales, NTPC is ranked number one followed by Reliance Infrastructure. However we need to go deeper into other parameters to see how Tata Power stands with respect to competition.Profitability ratio

Again NTPC wins hands down as it has highest profitability even while having highest sales. Tata power’s profitability has hovered in the range of 15% over the last 3 years. Reliance infrastructure is picking on its profitability.

Liquidity

Tata power maintains a healthy liquidity of above 1.5 all through the years given. In the current year, reliance infrastructure is showing a poor liquidity position of 0.75 due to heavy investments in Sasan Ultra Mega Power project and other smaller projects in the pipeline.NTPC is enjoying a healthy liquidity position in all the years.

Sales growth versus market valuation

CompanyReliance Infrastructure NTPC

Tata Power

Sales growth 52.25713 0.131209 -13.8725

P/B value 2.506921 2.865129 3.263526P/E ratio 24.76 20.83 29.06

It is instructive to note that even though Tata Power experienced negative sales growth, it enjoys the highest P/B value among its competitors. This is because the investors value the company’s assets at much higher rates than the balance sheet.

In addition, Tata Power also enjoys the highest P/E multiple among its competitors. The reasons for this are as under:

1. Tata power is soon going to bring on-stream the Mundra UMPP (Ultra Mega Power Project) which will generate substantial revenues.

2. The government via the Electricity Act 2007 has already opened up the market for power generation. It now plans to allow private players in the market for power distribution as well nationally. This is where Tata power can leverage its past experience of distribution(North Delhi Power Ltd) and expand at a fast clip

3. Its presence in the hydroelectric power segment in Maharashtra and wind power segment means that Tata power is present in the renewable energy segment as well. This segment is expected to see major policy initiatives by the government to encourage investments and Tata power will be in an advantageous position.

Capital expenditure versus Dividend payout

CAPEX

CAPEX

CAPEX

Reliance has the lowest capital expenditure among its competitors and a lower dividend payout than Tata Power. Management of Reliance seems to be saving up funds for future capital expenditures. Tata Power on the other hand is aggressively spending on capital acquisition and giving handsome dividend payouts as well. A healthy financial position of the company is ensuring this combination of strategies. NTPC due to its sheer size has the highest capital expenditure which has jumped 57% over the last year but giving a low dividend yield.

Industry specific indicator

In a capital intensive industry such as power sector, a good indicator of a firm is the asset efficiency. Asset efficiency measures the revenue generating capacity of operating assets. In the case of power companies there’s hardly any other asset than the generation units, heavy machines and construction units. Hence in this case we can safely use operating assets as Total assets-investments as employees/customers cannot be considered assets in this case (unlike service firms)

Fixed Asset Turnover Ratio

Company 2005 2006 2007 2008 2009

Reliance Infrastructure

1.85 1.85 2.56 0.99 1.40

NTPC 0.74 0.76 0.82 0.7 0.67

Tata Power 1.17 1.41 1.40 0.91 0.81

DIVIDEND

As we see, the revenue generation from assets of Tata power compares favourably with its biggest competitor. However a matter of concern is that the other big competitor (Reliance Infrastructure) is enjoying much higher efficiencies. This will give it substantial advantages in the market place especially when it becomes even more competitive with the entry of newer firms.

Additionally Tata Power’s efficiency is steadily falling from its peak of 2007. It may be due to operational adjustments but it needs to be more than 1 to have parity with Reliance Infrastructure.

Overall comments on the financial health

Impact of New CERC (Central Electricity Regulatory Commission) Norms

CERC has approved Tariff Norms and Regulations for the period FY09 – 14 pertaining to power generation and transmission utilities. This will have a significant impact on the performance of the company. The data below is an estimate by Tata Power on the impact of the new norms on its financials

The company is on a massive expansion drive and the expansion plan till Mar 2012 incorporates using 23.3% own funds and the rest amount would be gathered through external loans.

New Generation Projects

250 MW Expansion Project at Trombay Thermal Power Station: The 250 MW imported coal based plant was commissioned during the year and started commercial operations from end March 2009.

Wind Power: The Company proposes to commission additional capacity of 47.30 MW in Gujarat, Karnataka and Maharashtra during FY10.

Diesel Generation (DG) Capacity: The Company has decided to sell 6 DG sets (60 MW) in view of high fuel costs and is in the process of finalizing the arrangements for the same. The Company expects to commission the remaining 4 DG sets during the year.

A 120 MW coal based power plant is being constructed at the Company's existing site at Jojobera. On a cumulative basis, over 60% of the project has been completed. The project is expected to be commissioned in Q3 of FY10.

Maithon Joint Venture Project: Maithon Power Limited (MPL), a joint venture between the Company (74%) and Damodar Valley Corporation (DVC) (26%), is constructing a 1,050 MW (2 x 525 MW) power plant at Maithon in Jharkhand. The first unit is expected to be commissioned in Q3 of FY11 and the second unit by the end of FY11.

Overall the company projects are moving on smoothly. However the cash flows can create some concerns for the corporate growth plans. Also the company is using supercritical technology for its Mundra UMPP which is a first-of-its-type in the country. Any problem regarding stabilization of these units could be a major risk for the company. Effect of international fuel price variation would pose an additional pressure on earnings and thus affect valuation estimates. Also, equipment ordered from abroad and

loans taken in foreign currency for various projects could lead to exchange loss / gain.

REFERENCES

1. Annual and quarterly reports of Tata Power Company Ltd

2. Annual reports of Reliance Infrastructure and NTPC for competitive analysis

3. Stock quotations and other data from www.moneycontrol.com

4. Securities research reports by HDFC securities on Tata Power