Adani Power vs Tata Power vs NTPC

NTPC, Adani Power & Tata Power are three of the biggest Power producers in the country, whose shares are listed on the stock exchanges. NTPC is the public sector behemoth with a current installed capacity of around 47,200 MW. Adani Power comes next with an installed capacity of around 10,500 MW. Tata Power has been overtaken by the much much younger Adani Power last year as it's installed capacity stands at around 9200 MW. While NTPC and Adani Power are pure-play Power Producers, Tata Power is also into Power Distribution and Transmission.

There are quite a few State Electricity Boards who have power generation capacity higher than that of Adani Power, but none of them are investible for the general public. NTPC single-handedly meets nearly a quarter of the country's total power demand. The Private sector currently contributes just about 35% of the country's power requirement, but their contribution is increasing with every passing year as nearly 60-65% of incremental capacity addition is taking place in the private sector. Most of these use the latest technologies, which are more efficient than that used at the older power plants of the public sector units. Over a period of time, even these ageing power units will either have to shut down operations or swap their machinery for the latest technology.

For this comparison, I have considered three important financial parameters of the three companies for the last 4 fiscals, which gives us an idea of the comparative progress made by the three of them.

1) Total Income: Between FY'13 and FY'16, NTPC's Total Income has shown negligible growth. The lowest figure was Rs.75,279 crores in FY'13 and the highest figure was Rs.82,675 crores in FY'15. In FY'16, NTPC's Total Income again dipped below the Rs.80,000 crores mark. That means NTPC's Total Income has grown just about 6-7% over the last 3 fiscals. Tata Power too hasn't done much better with it's Total Income having improved by about 13% over these 3 years and now stands at Rs.37,559 crores. On the other hand, Adani Power, which was a baby in FY'13 with Total Income of just under Rs.7000 crores, has rapidly grown up to touch a figure of Rs.25,402 crores. Most of it's existing capacity was commissioned in these 3 years. I am expecting Adani Power to be on the verge of overtaking Tata Power in Total Income stakes by the end of FY'18 or before.

NTPC did not add much capacity over the recent few years, but it does have some large capacity addition projects under construction since the last 1-2 years, which will be commissioned over the next 1 to 3 years timeframe. Some of these larger projects will enable the company to shut down some of the very-old, inefficient & polluting power plants. Tata Power has announced several small to medium sized renewable energy projects over the recent few quarters, involving Wind & Solar Power. It seems like Tata Power is currently more focused on improving it's Power distribution business in Mumbai & Delhi regions. The Power Distribution business has the potential to generate strong recurring cash profits once it reaches a critical mass.

2) EBITDA: NTPC is again the worst performer here with it's EBITDA down by about 5% over the last 3 fiscals. Still it's worth mentioning that despite being a PSU, it's EBITDA margins are around 25%. Yes, these margins are substantially lower than what most Private sector projects generate after being in operations for more than a couple of years. But the average age of NTPC's assets runs into a couple of decades. Add to that certain PSU-related inefficiencies. And then the 25% EBITDA margin figure starts looking respectable.
Coming to Tata Power, it has seen a substantial jump in EBITDA in FY'16, after it being near-stagnant for 3 years. It's FY'16 EBITDA is nearly 33% higher than FY'13 levels. Tata Power's EBITDA margins currently stand at under 25% levels, but things have been improving over the last 1 year, both on Generation front as well as Distribution side. We could see further noticeable improvement in FY'17.
Use of latest technology is clearly showing in the huge improvement shown by Adani Power's EBITDA numbers over the last 3 years. Eventhough Adani Power's Total Income had jumped about three & half times, it's EBITDA has jumped about 7 to 8 times over the same period. Adani Power's EBITDA margin currently stands at just over 34% and there is scope for some more improvement as some of it's recently commissioned projects reach maturity stage. Adani Power even managed to turnaround the operations of the 1200 MW Udipi Power project (which it acquired from Lanco) within 1 year.

3) Interest Cost: The biggest outgo for any Capital Intensive business after EBITDA is the Interest Cost. The Interest Cost is generally the heaviest in the initial few years post commissioning and gradually reduces as the project matures and starts repaying portions of the debt every year. Here the higher age-profile of NTPC & Tata Power assets becomes their advantage. The annual Interest Cost of both these companies is much lesser than that of Adani Power. Still it is worth noting that NTPC's Interest Cost has been increasing with every year over the last 3 years. From a level of Rs.2481 crores in FY'13, it has increased to Rs.4151 crores in FY'16. That means over the last 3 years, NTPC's EBITDA has come down by about Rs.1000 crores, but it's Interest outgo has increased by about Rs.1700 crores, resulting in reduced Pre-Tax Cash Profits.
Tata Power has done better here. It's Interest outgo saw a jump in FY'14, but has remained steady around the Rs.3500-3600 crores mark. This has resulted in a smart jump in Tata Power's pre-Tax Cash Profit during FY'16 and FY'17 is expected to be even better.
Adani Power being in the commissioning phase of it's different projects over the last 3 years, has seen it's Interest Cost jump from Rs.1703 crores in FY'13 to Rs.5964 crores in FY'16. In fact Adani Power's EBITDA for FY'13 was nearly Rs.550 crores lower than it's Interest cost for that year. But things improved substantially in FY'14 & FY'15 when it's EBITDA was higher than it's Interest outgo by about Rs.700-800 crores each time. During FY'16, the gap between Adani Power's EBITDA and it's Interest cost has jumped to almost Rs.2800 crores. This Cash-Profit comfort is very crucial for Adani Power during it's next phase of growth. I would say that this is the start of Adani Power's golden period. Going forward I am expecting only a moderate increase in Adani Power's Interest Cost with every new project commissioning as the improving Cash Flows from existing projects will help keep the Interest burden in check. This should lead to substantial increase in Cash Profits in the coming couple of years & beyond.

Valuations:

At current levels, NTPC's Market Cap stands at around Rs.1,50,000 crores, while that of Tata Power is close to Rs.20,000 crores and Adani Power's at around Rs.10,000 crores. I am expecting things to change dramatically over the next 5 years. Both Tata Power & Adani Power could see their Market Caps to surge past the Rs.50,000 crores mark during the coming 5 years, i.e. by the end of FY'21. Why am I so confident? Demand for Power is expected to grow at a healthy pace, given that Indian economy has the potential to maintain 7+% annual rate of  growth. With the Govt. aggressively trying to ensure that electricity reaches each & every village and 24x7 Power supply across the country before the end of year 2020, we could very well see Electricity demand grow faster than it has in the past. Adani Power with it's highly efficient power plants will certainly benefit from this expected demand surge. Adani Power itself has set a target of achieving 20,000 MW installed capacity by year 2020, that means approximately double of what it has today. With Govt wanting to setup 100 Smart Cities, there is a possibility of auction of Power Distribution licenses with substantial Private sector participation expected. Here again companies like Adani Power & Tata Power could be beneficiaries. Tata Power's city-level Distribution experience will certainly come in handy here.

In short, there is immense scope for progress for efficient & capable producers as well as service providers. NTPC too will gain from it, but because of it's size & PSU roots, the percentage gain will be much smaller when compared to aggressive & nimble-footed private sector competitors.

Tata Power Ltd. - Powerful margins, Coal slightly sluggish.

Tata Power's Q3 result has some positives & some negatives. The company's Total Income figure was flat Y-o-Y and 2.5% lower Q-o-Q. The reason being lower revenues from Coal business because of lower Coal prices. Tata Power did well on the EBITDA margin front where it managed over 450 bps improvement over that reported in Q3 of last fiscal. Even compared to previous quarter, the EBITDA margin was slightly better. The company has attributed this improvement to strong operating performance of it's Power subsidiaries. I think there is still scope for improvement in some of the company's Power subsidiaries, which should be seen over the next 3-4 quarters.

In the following charts I have shown the T-T-M progress of Tata Power's Total Income, EBITDA, Profit before Tax & Provisions and finally the Interest Cost. Have a look:

As we can see from the charts, Tata Power's Total Income has stagnated this quarter, but the EBITDA is still showing continued strong improvement Q-o-Q. I think we will see one more such strong Q-o-Q improvement in EBITDA and then the improvements will be much slower, though it will be positive. Tata Power's T-T-M EBITDA crossed the Rs.9000 crores mark this quarter and the company has been hitting a new Best-ever figure over the last 3 quarters. I am expecting Tata Power to even hit the Rs.10,000 crores in T-T-M EBITDA sometime in the next 3-4 quarters. This surge in EBITDA over the last 3 quarters is clearly the signal that the worst pain period for Tata Power is finally over, after having struggled ever since the company jumped into the UMPP bandwagon & few other projects, all of which have faced difficulties at some level or the other.

The sharp improvement in EBITDA will ultimately lead to improved Cash Flows from operations, which will ultimately help in reducing the Debt burden to some extent and hence reduce the Interest Cost load. Tata Power has reported a Q-o-Q and Y-o-Y dip in Quarterly Interest Cost over the last 2 quarters. As of now the dip is not big, but I am expecting a little bigger drop in Quarterly Interest Cost over the next few quarters, which should help boost the company's Cash Flows further. The improved Cash Flows from existing operations will help the company pursue it's projects under implementation with a new vigour. Tata Power has also created a new Renewable Energy subsidiary and is shifting all it's Solar, Wind & Hydro assets into that subsidiary. This restructuring should help streamline it's operations as the company has big plans for Renewable Energy space.

The Net Profit of the company continues to be impacted because of various Provisions. Some of these Provisions involve Cash Payouts, while some others are just Accounting measures. Nevertheless these Provisions do pull down the company's Net Profit figure, which looks bad on the P&L. In the charts above, we can see the sharp improvement in T-T-M Profit before Tax & Provisions for Tata Power over the last 3 quarters, but unfortunately a major portion of this gain was wiped out by the various Provisions the company undertook. Hopefully the Provisions will reduce in the coming quarters and then we will see sharp improvement in the company's reported Net Profit figure.

About Valuations, I had already discussed it in my previous report on Tata Power posted couple of months ago and the company continues to trade around the same Market Cap level as then. I am clearly bullish on the possibility of Tata Power stock getting re-rated in the coming months to the tune of 50-75% over the next 12 months or so.

Tata Power - profitability coming back to normal.

Tata Power has been a largely ignored stock for the last few years. Primarily because the entire Power sector was largely ignored by most Investors, reasons for which have been discussed many a times in the past on various forums. But there is something happening over the recent few quarters that Investors are ignoring again, but they should definitely take note of.

Tata Power's consolidated quarterly numbers are showing some handsome signals of improvement in the company's business operations over the last 2-3 quarters. On one hand, Tata Power's Consolidated Quarterly Total Income has posted double-digit Y-o-Y growth for 2 consecutive quarters this fiscal. This has helped the company to post highest ever Quarterly as well as T-T-M Total Income numbers during the Sept'15 quarter. On the other hand, Tata Power has managed to post 4 consecutive quarters of smart improvement in EBITDA margins. Tata Power's T-T-M EBITDA margin at the end of Sept'14 was just 18.50%, which has seen a remarkable improvement to 23.95% by Sept'15.

The huge 400+ bps improvement in EBITDA margins, accompanied by small bit of increase in T-T-M Total Income, has lead to a smart 39% increase in Tata Power's T-T-M EBITDA over the last 1 year. Even as the EBITDA has seen a big jump over the last 2-3 quarters, Tata Power has managed to keep a lid on it's Interest Costs, which has helped the company an over 50% jump in it's T-T-M Cash Profits. This big jump in Cash Profits has enabled the company to return to Net Profits over the last few quarters, despite higher Provisioning. On a T-T-M basis, Tata Power has posted a Net Profit of Rs.845 crores by Sept'15, which translates into an EPS of little over Rs.3/-. Despite all this improvement in operational numbers, Tata Power has seen it's Market Cap slide from over Rs.23,000 crores at the end of Sept'14 to under Rs.17,000 crores by Sept'15. At the current share price of around Rs.62/-, Tata Power trades at less than 6 times it's T-T-M Cash Profit, which itself is improving rapidly. Even at the current price, I think this is attractive valuations based on T-T-M numbers. And the valuations will look even more attractive if we consider the potential improvement in Cash Profit & Net Profit numbers over the next 2-3 quarters.

I think this is an excellent opportunity for long term investors to invest in this sector and Tata Power, alongwith couple of other large Private sector Power Producers like Reliance Power & Adani Power, do make a lot of sense for investors to increase their exposure to these stocks. But the investment horizon should purely be long term.