Sunday, July 3, 2011

Tata Power - Buy on declines

Tata Power

CMP Rs 1,241

Being a fundamentally strong power utility company, Tata Power has always reported steady growth numbers and this is why it has made it to the final list. For example, its revenues and net profit have increased by 21% and 25%, respectively, in the 2007-8 to 2010-11 period. However, the 2010-11 performance was not that stellar (mostly affected by the headwinds facing the sector) and the company saw only a small growth. Its revenues and net profit have grown only by 3% and 5%, respectively.

But with new projects on the stream, analysts feel that good days are going to return soon. For example, its Maithon Power plant's first unit is expected to be on the stream in June 2011 and its second unit is expected to start functioning in October 2011.

The first unit of Mundhra Power project is also expected to start by September 2011 and the second unit before March 2012. While most power players are still struggling with coal linkage issues, Tata Power is in a much better position because it has already tied up for the coal requirements for all its new projects. And the stock is now available at a reasonable PE of 14.31.

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However, note that the entire sector is facing headwinds (due to fall in merchant power rates, projects getting delayed due to environmental issues, etc) and, therefore, this counter is also expected to remain choppy for the next several months. So it will be safer if investors stagger their purchases.

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Our Recommendation :
The power sector has lots of problems in view of shortage of coal and the merchant power agreements with SEBs The entire sector is having problems with reference to execution delays and environmental clearances.

Avoid at current levels and on steep falls buy around Rs.1200 for a target price of Rs.1500

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