The weekend at the Stock Markets was influenced by the terrorist attacks on the Indian Parliament on Thursday. After an initial panic fall the markets recovered on Thursday itself but could not resist a further 1 % fall on Friday. The Sensex ultimately closed at 3353 down from 3436 last week. This fall can be attributed to a correction from the last on month jump of over 300 points and also to the fact that markets have a long weekend. It has also been an observed phenomenon in recent years that the FII s go quiet on new buying towards the end of the calendar year. The current level of the market despite the fall during the week therefore indicated an under current of strength which may surface in an upward break out during the first week of the New Year. 

The fall of Enron has caused a concern and confusion in the market in the recent days. The Company had several claims on the Indian Government while Banks such as IDBI had a heavy exposure on the Company. The plant is idle since June and the employees have been laid off. Indian financial institutions have an exposure of over Rs 700 crores.  The effects of insolvency proceedings could therefore leave a trail of devastation in the Indian markets, which cannot be brushed aside. 

Considering the damage likely to be caused to the Indian economy by the closure of the plant, there was a need to find an alternative solution that enables the plant to continue production in the 2184 MW   plant. In this context, investors in general may feel happy to know that two of India’s leading Power Generation and Distribution companies namely BSES and Tata Power have made a bid for the Dhabol plant. The two companies will after a due diligence process submit their bids for the 65 % equity stake of the Enron Corporation. Considering the imperative needs not to let the Dhabol plant die, it is inevitable that the deal will be successfully put through. In effect therefore the management of the Dhabol plant will pass on to an Indian Company either the BSES of Birlas or the Tata Power of the Tatas. Either way it would also be easy for the Maharashtra Government to strike a compromise on the pricing issue also and hence the insolvency of Enron has in fact paved the way out of the impasse. 

It is also a natural corollary that there is no better time for BSES and Tata Power to strike a good bargain on the pricing and hence one can expect that the deal will preserve and enhance the present share holder value of either of the two companies if they succeed in their bid. At this point of time it is difficult to take a guess who would eventually succeed, but it may be strategically a good idea for investors to buy and hold the shares of both the companies before they raise in expectation. We shall take a look at Tata Power today which is the largest private sector power generating Company with a capacity of 2300 MW.

Tata Power is an amalgamation of three companies, Tata Hydro-Electric Power Supply Co (established in 1910), and Andhra Valley and Tata Hydro, which merged with Tata Power on April 1, 2000. It has a presence in all areas of the power sector: thermal, hydro, solar, transmission and distribution, as well as in energy and broadband communication.

The company has provided economical and reliable power for over 80 years to Mumbai, the capital of highly industrialized Maharashtra state and the commercial hub of India, as well as its outlaying areas. Tata Power owns, operates and maintains thermal power plants in several Indian states. 

For the year ending March 2001, the Company recorded a sale of Rs 3371 crores and a Net profit of Rs 390 crores on an equity base of Rs 197.91 crores. For the half year ending September 2001, the Company has achieved a sales of Rs 2021 crores and a profit after tax of Rs 331 crores. The EPS has therefore increased from around Rs 16.24 to around RS 24. The last year peak value of the share price was around Rs 145 in May 2001 after which the price had dropped to around 100 in September 2001. The price has now edged up to Rs 127.

With the impeccable credentials that are in its possession, Tata Power has more than an even chance of emerging as the successful bidder for the Dhabol project. With or without this development it may be a good time to invest in the shares of Tata Power at around Rs 127-130 which represents a moderate P/E discounting of around 5.

Na.Vijayashankar
December 14, 2001