February 26, 2001
Tata Electric Company – Building Capacities

BUY
CMP: Rs146.35
BSE Sensex: 4122.16
52-week High / Low: 180.70 / 44.25
Average Daily Volumes: 2.5mn shares

Investment Rationale

• Additional 491MW capacity to be added by June 2001. Commercial production of Jojobera Phase I has already commenced commercial production in the month of January 2001 and progress of other projects is going satisfactory.
• Sales to direct customers to go up sharply. In the first nine months of FY01, sales to direct consumers stood at around 72mn units, which is expected to go up to around 100mn units by the year end. Direct sales is expected to grow by around 45% for the next five years.
• Tata Petrodyne, the wholly owned subsidiary of Tata Power, has struck oil and gas at three fields - Lakshmi (gas), Ambe (gas and oil) and Gauri (gas and oil) – in the Gulf of Cambay, off Gujarat.
• The company has earmarked around Rs10bn for its broadband plan. The company has got an all India ISP license and the project is under vigorous implementation.
• Seeing the crises, government is expected to push reforms in the power sector in a big way. Most of the multinational power majors have exited India. Under this scenario, companies like Tata Electric Company would be a major beneficiary.
• Presently the scrip is trading at 7.8XFY01E earnings. In FY02, the company is expected to grow by around 40%yoy without taking the income from Tata Petrodyne. We see a good upside potential from the current levels and hence we recommend a BUY.

Expansion plans progressing satisfactorily

2 X 120MW Jojobera Plant: The company has satisfactory synchronized 120MW Phase I of Jojobera and the commercial production has already started. The second phase again of 120MW would be commissioned by June 2001, almost five months ahead of schedule. For both the plants, the company has entered into an agreement for purchase of electricity at 75% PLF.

81MW IPP at Belgaum: Mechanical works for an IPP in Belgaum is complete. The project was pending because 110KV transmission lines were not set up for the project. It has come to our knowledge that the transmission lines are now in place and the project would start commercial production by April 01. The company has entered into an agreement for sale of power with KSEB again at 75%PLF with a plant availability of over 90%.

Repowering a 250MW unit in Trombay: The company is scrapping a 150MW plant, against this it is planning to charge a 250MW plant in Trombay. Net, the company would be adding around 100MW to its generating capacity. The company has made an application for the same to MSEB and the approval would be granted shortly.

Direct sales to grow by around 45%p.a. for next five years

Tata Power is aggressively promoting direct sales of power in its licensed area. Loss of sales to Textile Mills used to compensate for all the gains made on the front of direct sales. However, most of the textile mills have closed down in Mumbai and there is not much scope of loss on this front. Seeing the aggressive sales policy and business conduct we believe that the direct sales business of the company would grow from 100mn KwH in FY01E to around 1000mn KwH in FY05.

Tata Petrodyne has struck one of India’s largest gas reserves in Cambay

Tata Petrodyne, the wholly owned subsidiary of Tata Power, has struck oil and gas at three fields - Lakshmi (gas), Ambe (gas and oil) and Gauri (gas and oil) - in the Gulf of Cambay off Gujarat. Lakshmi field alone has a discovery of around 250bn to 300bn of cubic feet of gas, which would make it one of the biggest reserves in a field in India. The exploration participation interest in the block will be shared in the ratio of 15%, 75% and 10% by the Tatas, Cairn and ONGC. However, ONGC has the right to increase its interest in the block to 30% in which case Tata Petrodyne`s interest will fall to 10%, and Cairn`s to 60%.

Tata Petrodyne has also formed another consortium with Enron, ONGC and Hindustan Oil Exploration Company for the exploration of the northern block in the Gulf of Cambay called CB-OS\1. It holds a 10% interest in the block. The oil and gas strikes have come as a major fillip to Tata Power`s plans to emerge as a fully integrated energy company.

Broadband business going as per plans

The company is having a capex plan of around Rs10bn for its broadband business. It has also got an all India ISP License. The company has also placed orders for backbone equipment to light up Mumbai fiber-optic network and has also appointed Boston Consulting Group to make the feasibility studies for the same. The company is setting up OFC network backbone and will be tying up with local contractors for last mile connectivity. The company is having good experience of distribution and the business model structured looks sound. However, this broadband business will not earn revenues to the company before FY03.

Power sector reforms to help Tata Power

The realization of power crises has assumed unseen proportions. The government looks serious to push reforms in the sector. Most of the transnational power majors have exited India. To bring investments in the sector, government seems determined to remove 16% cap on returns imposed on power companies at the same the proposition of allowing direct of power it also under active considerations of the government. Under this scenario, the major beneficiary of increasing investments would be local power companies.

Valuation

Presently the scrip is trading at 7.8XFY01E earnings. We believe that the company will continue to grow by 40%yoy in FY02. In FY03, the broadband business and Oil & Gas business will start earning revenues giving a major boost to bottomline of the company. At this price we recommend a Strong Buy.

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