Tata Power shareholders can consider booking profits on their holdings. The stock has run up rather sharply in the last two months, gaining by 67 per cent to Rs 1,252 on Friday. At this price, the stock discounts the annualised sustainable 2007-08 EPS (on fully diluted equity) by a whopping 35 times. The valuation — at 29 times — is not cheap either, if you take the unadjusted earnings of the first half ended September 30.
Fundamentally, there has been no material change in the company’s prospects between September and now that would justify this surge in valuation of the stock. The market’s sudden recognition of the good long-term prospects for the power sector has buoyed up most power/equipment stocks and Tata Power is one of these.
The company’s performance in the second quarter certainly does not provide any justification for the spike, either. Though revenues increased 12.5 per cent to Rs 1,350 crore, sustainable earnings (net profit excluding extraordinary items) actually fell 10 per cent to Rs 182 crore.
That said, the long-term prospects for the company appear bright indeed. Tata Power is on an ambitious capacity expansion programme that will see it adding about 10,000 MW of capacity in the next five years. This includes the 4,000-MW ultra mega power project (UMPP) at Mundra, where the company is making good progress. Orders for key machinery and equipment have already been placed and the company has also tied up for a part of its fuel requirements through the equity acquisition in Indonesia’s PT Kaltim Prima Coal and PT Arutmin.
The company did not bid for Krishnapatnam UMPP but is in the race for the next one at Tilaiya, in Jharkhand, another 4,000-MW project. Besides this, it is implementing a 1,000-MW project at Maithon in partnership with Damodar Valley Corporation. Tata Power is also examining the feasibility of setting up a 3,000-MW plant in coastal Maharashtra based on imported coal.
While all these projects will catapult the company into the big league, taking its capacity close to 15,000 MW by 2012 from 2,300 MWnow, investors should note that revenues and earnings from these expansion projects are at least five years away. Growth in earnings in the interim may not be high enough to justify the current valuation for the stock. Shareholders can book profits at the current price, which does appear expensive.