Group 6, Section C
Competition & Strategy Report on Firm Analysis
TATA POWER
29 Nov, 2016 Group 6, Section C
Abhishek Ghosh
1611151 161115 1
Ganesh G A
1611170
Praveen Kumar
1611196
Vardhaman Vardhama nV
1611213
Vijay Venkatesh S
1611216
Group 6, Section C
Table of Contents Table of Contents .................................................................................................................................... 2 INDUSTRY OVERVIEW .............................................................................................................................. 3 FIRM OVERVIEW ...................................................................................................................................... 3 TATA POWER ........................................................................................................................................... 3 PERFORMANCE OF TATA POWER............................................................................................................. 4 RESOURCES AND CAPABILITIES OF TATA POWER ..................................................................................... 7 BRAND: ............................................................................................................................................ 7 FINANCIAL POSITION: ...................................................................................................................... 7 R & D, TECHNOLOGIES: .................................................................................................................... 7 JVS, STRATEGIC DIVISIONS: .............................................................................................................. 8 VALUE CHAIN INTEGRATION: ........................................................................................................... 8 INTERNATIONAL PRESENCE:............................................. .................... ......................... .......................... ......................... ............. 8 MANUFACTURING CAPABILITIES: ..................................................................................................... 9 VRINE ANALYSIS FOR TATA POWER AND RELIANCE POWER: .............................................. ..................... ......................... .................... 10 TATA POWER ................................................................................................................................. 10 RELIANCE POWER .......................................................................................................................... 11 STRATEGIC OPTIONS.............................................................................................................................. OPTIONS.............................................................................................................................. 12 STRATEGIC INTENT ................................................................................................................................ 13 RENEWABLE SOURCE BASED POWER GENERATION ....................................................................... 14 CAPACITY CREATION IN TRANSMISSION AND DISTRIB UTION SEGMENT ......................................... 14 SECURING COAL AND OIL SUPPLY BY LONG TERM CONTRACTS ................................................ ....................... ......................... ...... 14 VALUE ADDED SERVICES LIKE POWER TRADING ............................................................................. 15 MERGERS AND ACQUISITIONS ....................................................................................................... 15 SOURCES OF COMPETITIVE ADVANTAGE ....................................................................................... 16 RECOMMENDATIONS FOR THE FUTURE................................................................................................. 17 LEVERAGE INTERNATIONAL PRESENCE .............................................. ..................... ......................... ......................... .................... 17 ACQUISITIONS AND DIVESTMENTS ................................................................................................ 17 SOLAR PANEL MANUFACTURING ................................................................................................... 17 EFFICIENT COAL SUPPLY CHAIN ...................................................................................................... 18 REFERENCE .................................................................................................................................... 19
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INDUSTRY OVERVIEW Sustained economic growth is continuing to fuel the demand for electricity in India. This is matched by the improvements in the supply side as well on factors like fuel, supply chain and finances. At the moment, the generation is dominated by the thermal sector (about 60%). Hydroelectric sector comes a distant second with 15% market share. The remaining percentage is divided among the renewable sources and nuclear power plants. Recent emphasis on renewable energy sources supported by favorable govt. policies is expected to drive the growth. Also 100% FDI in the sector is expected to bring new technologies and practices. The transmission and distribution stages represent the bottleneck in the value chain of the power sector. The transmission and distribution losses exceed 25% which is more than twice the world average. The growth at the moment here is driven by investments from private players and Power Grid Corporation. The State Electricity boards are heavily debt ridden and hence are not able to make any substantial investments in this area.
FIRM OVERVIEW TATA POWER Tata Power is a part of the reputed TATA group. It has an installed capacity of 10,477 MW
[1]
. The firm’s
vision is “To be the most admired and responsible integrated Power Company with international footprint, delivering sustainable value to all stakeholders” [1]. The Company operates in two segments
namely Power and Others. The former is engaged in power generation, transmission and distribution. The latter includes electronic equipment and project consultancy. Tata power SED (Strategic engineering division) is the most important unit in this other segment
[1]
. It primarily deals with the defense sector
and has executed many projects for Indian armed forces. The firm is involved in Fuel Logistics, Generation, Transmission, Distribution and Trading. It also operates many PPPs in Generation, transmission and distribution areas. It has one of the largest clean energy portfolios with installed capacity of 3042 MW
[1]
. Tata Power is also expanding its international
presence with strategic investments i nvestments in Africa, Australia, Europe, Middle East and south East Asia [1].
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Figure 1: History of Tata Power [2].
Tata power has seen a considerable evolution in the last century since its inception. Tata power commissioned India’s second hydro-electric project in 1915 and since then established itself amongst the pioneers of power producers and distributers. .It was also the first power company to implement SCADA (supervisory control and data) in power transmission function. Tata power was also the first to use pump storage units and manufactured some of the largest wind energy and solar powered plants. In 2013 Tata power established an Ultra Mega power project at Mundra, based on super-critical technology. With consistent growth, expansion and acquisitions of major power plants, Tata power has grown over time to become the largest private integrated power company in the country. In 2015 they acquired NELCO’s defense sensor business, to grow their defense solutions business [3].
PERFORMANCE OF TATA POWER In spite of power industry having low attractiveness due to various reasons explained above in industry analysis, TATA power has been operating relatively close but lower than industry average. From the below comparative analysis, the power distribution and generation industry seems to be operating at a risk of 1.02 and provides a return of 14.44%. Tata power seems to be operating at a risk of 1.14 and provides a return of 5.65%. 5 .65%. [4]
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Figure 2: Risk return comparison of TATA power with insudtry[4] It is also clear from the figure 3 that the reliance power seems to be operating at higher risk of 1.6 with a return of -24.59% which is way w ay below the industry average[5]. Tata power is a large cap company in power sector with market cap of Rs. 18918.88 Cr. Tata power’s major revenue comes from f rom sale of power supply (89.87%) and Electronic products (6.23%).
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Figure 3: Risk return comparison of Reliance Power with insudtry[5] The return on capital employed for Tata power is 10.28% which is well above its peer average of 6.56% [4]
. It is also also operating at at Net profit of 2.39% as compared to the peer average of of -11.93[4]. The revenue
has
been
almost
constant
for
past
4
years
Figure 4: Net sales of Tata power over past 5 years [6].
which
is
8,819.65
Cr
for
2016[6].
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Though the growth in operating profit has been steady it is also slow slow for past 4 years. It is to be noted that the operating profit margin seems to have increased from 24.35% in 2015 to 31.51% in 2016[6]. The company has also been paying dividend at range of 115% to 130% for past 8 years [6].
Firgure 5: Operating profit and OPM for TATA power for past 5 years[6].
RESOURCES AND CAPABILITIES OF TATA POWER BRAND: Tata power is one of the 50 most valuable brands in India. TATA being one of the most trusted brands in India, firm is in unique position to leverage this. As firm enters into distribution in new markets, strong brand recognition can b e used to firm’s advantage. FINANCIAL POSITION: Being part of the Tata group, the company enjoys the synergy of the India’s largest conglomerate. Tata Power has witnessed a positive positive growth over the last 5 years and net profit stood at 873 Crore for FY 2015-16, 420% increase from FY ‘14-’15. [7] R & D, TECHNOLOGIES: Being the largest integrated power company, Tata power has a strong R&D base and has achieved many firsts in the country, including India’s first 4000 MW Ultra mega power
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plant at Mudra. Also it operates one of the largest solar park in India. Also Tata power in collaboration with Sunengy, an Australian firm is developing India’s first floating solar panel based on liquid array technology. Also the firm was awarded second prize in ‘National Energy Conservation awards’ for DISCOMs. These provides a proven technology to the firm for medium term [1].
JVS, STRATEGIC DIVISIONS: Tata power has entered into strategic public private partnerships (PPP) in transmission and distribution sectors. This gives long term viability to capital centric projects. Also the JVs with Tata steel and other companies have helped the company to explore captive power generation. Tata power also entered into JV with Damodar valley corporation (Under power ministry, govt. of India) in the power generation sector. These JVs have helped the company to expand its presence across sectors as well as long term viability of the projects [1]. Tata Power also has a strategic Engineering Division, which focuses on defense sector. It has worked on no of indigenous weapon programs such as Pinaka MBRL, Ak ash surface to air missiles etc. [1]
VALUE CHAIN INTEGRATION: Tata power has presence from coal mining to power generation. The presence of company in all parts of the value chain gives a distinct advantage. Tata power has a 30% stake in PT Kaltim Prima Coal of Indonesia
[1]
. Company also owns cape size vessels for coal
transportation and logistics. This control on raw materials for thermal power plants has helped the company to overcome issues of inadequate supply of coal in the past. [1]
INTERNATIONAL PRESENCE PRESENCE:: Apart from Indonesia, Tata power has a presence in many other countries in different sectors. Hydroelectric arm of the company has its plants in Bhutan, Georgia and Africa. Similarly, firm operates thermal power plants in Vietnam and Myanmar. Tata power has made investments in two different Australian firms in the field of clean coal technologies. Tata power intends to develop clean technology for future power plants through these investments. [1]
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Figure 6. International operations of Tata power.
MANUFACTURING CAPABILITIES: CAPABILITIES: Through its subsidiary like Tata ceramics ltd and Tata power solar systems limited, Tata power has the capabilities to manufacture subsystems for power generation and transmission. As there is no casual ambiguity, no activity system mapping is done.
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VRINE ANALYSIS FOR TATA POWER AND RELIANCE POWER: TATA POWER Resources/ Capabilities Financial Resources R&D
Valuable
Rare
Partnerships & Subsidiaries
ü
Brand Perception Generation Capacity International Presence
ü
ü
ü
Captive power generation
ü
ü
Distribution & Transmission Defense Solutions Renewable energy Transportation Capabilities
ü
ü
ü
ü
Inimitable
NonSubstitutable
ü ü
ü ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü ü
Exploitable
ü
ü ü
ü ü
ü
ü
ü ü
ü
ü
Competitive outcome Parity Competitive Advantage Temp Competitive Advantage Competitive Advantage Parity Temp Competitive Advantage Temp Competitive Advantage Parity Competitive Advantage Parity Parity
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RELIANCE POWER
Resources/ Capabilities Financial Resources
Valuable
R&D
ü
ü
Partnerships & Subsidiaries Brand Perception Generation Capacity
ü
ü
Parity
ü
Parity
ü
Temp Competitive Advantage Not a Competitive Advantage Not a Competitive Advantage Not a Competitive Advantage Not a Competitive Advantage Parity
ü
Rare
Inimitable
NonSubstitutable
Exploitable
ü
ü
ü
ü
ü
ü
ü
ü
ü
International Presence Captive power generation
Distribution & Transmission
Defense Solutions
Renewable energy Transportation Capabilities
ü
ü
Competitive outcome Temp Competitive Advantage Parity
Not a Competitive Advantage
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STRATEGIC OPTIONS A SWOT analysis would be a useful tool to understand a snapshot of the current scenario that the firm faces.
Figure 7: SWOT Analysis for Tata power.
FINANCIAL
PERFOMANCE
OF
TATA
POWER
VS
THE
INDUSTRY:
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Figure 8: Financial performance of Tata power. [6]
STRATEGIC INTENT Tata Power has an installed generation capacity of 3042 MW through green resources and 7436 MW through conventional sources. Tata Power belongs to a strategic group which operates in all the stages of the value chain of the power industry. This is a significant as it can capitalize on growth opportunities in all these segments. The presence in transmission and distribution segment is particularly crucial as it is the current bottleneck of the Indian Power sector. The firm even owns many captive coal mines internationally and even has it s own in house logistics arm for efficient transportation of resources. Also, by creating and maintaining vertical restraints, the firm can create and maintain a competitive advantage. This best explains the positive net profit margin that the firm enjoys while the power industry average is negative [6].
A study of the firm’s actions in the recent years reveals a clear focus on the following aspects:
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RENEWABLE SOURCE BASED POWER P OWER GENERATION Renewable sector at the moment contributes 28.9% to the installed power capacity at the moment. At the COP 21 climate change conference in December 2015, India has committed to generate at least 40% of power through renewable sources
[10]
. The government has also set its own targets for energy
generation that involves a 15-fold increase in solar power and a two-fold increase in wind energy capacity. Tata power is already a leading player in the renewable energy at the moment and hence is extremely well poised to make the best of this situation. It generates close to 30% of its power through renewable sources
[1]
. This means that they do not have any core rigidities that firms like NTPC have
which act as mobility barriers inhibiting their diversification into the renewable energy sector. The company has also indicated its willingness in its annual report to explore setting up of new green field projects and acquire smaller companies in the wind and solar segment. These require significant investments. The cash flow of the company is quite poor compared to industry standards and hence the company must re -evaluate its investments in the non -core sector like defense electronics and also divest them at appropriate junctures. junc tures. This will ensure a proper strategic fit.
CAPACITY CREATION IN TRANSMISSION AND DISTRIBUTIO DISTRIBUTION N SEGMENT The distribution and transmission functions to a large extent are carried out by state electricity boards. Many of these boards are heavily debt ridden and expansion to meet additional demand looks improbable. Many states are hence amending the policies to favor private investments. Because of high capital requirements, the company has established many joint ventures with Power Grid Corporation (the leading player in distribution and transmission) to use these opportunities effectively. Some states have distribution franchise model to improve the efficiency of transmission and the firm is actively pursuing many of this opportunities. The company has successfully implemented the PPP model too in cities like Delhi for rapid expansion in the transmission business. In the coming years, integration of renewable power will provide massive business opportunities and the company is well poised to utilize this. This is primarily because of its presence in renewable power generation function and its superior technology. This is very crucial because it can create entry barriers for new players and also serve as an isolating mechanism against other peers in t he transmission business [1].
SECURING COAL AND OIL SUPPLY BY LONG TERM CONTRACTS More than 60% of the current installed capacity of the firm is from conventional sources and it is integral that the company create an assured supply of resources for its thermal power plants. The company owns several coal mines in India and abroad and also has significant non- controlling stakes in
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several Indian coal companies. But there were re-bids for several coal blocks after the Supreme Court’s intervention in the coal scam. The company won a few bids which were very uneconomical. Internationally, however the prices of coal have dropped considerably as Western economies are looking to shift to renewable sources. Hence, the firm is looking at international mines to meets its sourcing requirements. The company has particularly invested heavily in Indonesian coal mines for captive use. While renewable energy seems the way ahead, coal will continue to dominate at least for the next 10 years and hence the firm is not ready to lose the focus on this segment.
VALUE ADDED SERVICES LIKE POWER TRADING The value added businesses like power trading, O&M services and solar EPC require very little capital and hence the company is looking to scale up its operations aggressively in this segment. The company is a part of Indian Energy exchange and Power Exchange of India
[1]
. The company is also present in both
short term and long term bilateral trading. The company also holds category ‘I’ license which permits it to trade unlimited quantum of power
[1]
. Given the growing requirements of industrial consumers, this
segment looks very profitable in the near future. The short term power contracts are generally more profitable than long term contracts and hence the company is willing to increase its contribution to the total volume of power traded. The proportion of power generated sold to industrial consumers is much higher for Tata power than peer firms. This is primarily due to i ts presence in the power trading segment.
MERGERS AND ACQUISITIONS TPREL (Tata Power Renewable Energy Limited) aggregated all its subsidiaries into a single entity into itself. This is to create a large entity that has distinct visibility in the market. The same entity also completed a 100% acquisition of Welspun Enterprise Limited (a leading renewable energy player) at a valuation of 1.4 billion dollars, which made it the largest transaction in the Indian renewable energy industry
[9]
. This should be seen in the back drop of continuously decreasing solar power tariffs in India.
This has eroded the profitability of players, making consolidation inevitable. The company has clearly indicated its willingness to acquire smaller renewable power firms where it could see potential synergies and offer access to new technology and markets.
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SOURCES OF COMPETITIVE ADVANTAGE Most of the players in the power industry have significant presence in only one of the stages of the value chain of the power industry. Tata power enjoys a significant competitive advantage due to its presence across the value chain creating significant vertical restraints and entry barriers for Reliance power and most other firms. Another important base of competitive advantage is low costs. The vertical integration of Tata power combined with operational excellence and reduced learning curves enables the firm to do well in this regard too as against its competition. This is reflected by the fact that the consumers of Tata Power enjoy the lowest tariffs in Mumbai. There is not much causal ambiguity associated with these sources of competitive advantage. The primary source of creating isolating mechanisms is technology. In this regard, international players hold the edge over domestic firms. Tata Power started off as a player primarily in the thermal segment. It is commendable that when the focus globally shifted to renewable sector, the company did not exhibit incumbent oversight and is the largest Indian player in the renewable sector, ahead of niche renewable energy players like Renew power.
Figure 9: Mumbai power tariff structure of Tata and Reliance power [11][12].
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The power tariffs in Mumbai vary by consumption slabs, type of consumer (industries or domestic) and by locality (South Mumbai, islands, suburbs etc). The following is the comparison between tariff structure of Tata Power and Reliance Power for domestic consumers in Mumbai suburbs. The consumption of a typical household in Mumbai is around 400 units
[11]
.
RECOMMENDATIONS FOR THE FUTURE LEVERAGE INTERNATIONAL PRESENCE Tata Power is one of the few Indian power players who have a significant global presence. The Indian market though poised for strong growth in the future does have a certain degree of uncertainty with respect to government policies. The company can mitigate this risk by expanding its global presence in countries like Middle East, Africa and Turkey. A focus on taking up government backed contracts will in general help to avoid political risks both in India and abroad. The country can also focus on project consultancy and technical advisory services in international geographies, which require minimal capital investments.
ACQUISITIONS AND DIVESTMENTS The company must explore setting up of new green field projects and acquire smaller companies in the wind and solar segment. These require significant investments. The cash flow of the company is quite poor compared to industry standards and hence the company must re -evaluate its investments in the non -core sector like and if necessary, divest them at appropriate junctures.
SOLAR PANEL MANUFACTURING Tata Power is one of the few Indian firms to have in house solar module manufacturing. With the sector looking to become more and more de regulated and declining solar tariff quotes in competitive bids, cost efficiency is of essence. The Indian firms in general lag behind established international solar panel manufacturers like Sun Edison and Suniva. Strategic joint ventures in manufacturing with selected international players of repute may give access to cutting edge technology. This will establish a high degree of vertical integration and contribute a significant competitive advantage in the solar power segment.
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EFFICIENT COAL SUPPLY CHAIN According to an AT Kearney report, an efficient coal supply chain with proper planning, sourcing, quality management, logistics and inventory management can reduce the total costs by as much as 12%
[8]
.
Establishing a strong tracking system to track the Gross calorific value, Sulphur and ash content across the supply chain. Establishing a FIFO system in inventory yards is a cost effective, yet efficient way of reducing GCV loss. Establishing a network with multiple nodes to act as parallel inventory stock points will help optimize inventory costs. Given that port capacity and railway logistics are bottlenecks, the above steps can provide a player with significant cost advantage.
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REFERENCE
1. T.
Power,
"Largest
power
company
in
India,"
2016.
[Online].
Available:
http://www.tatapower.com. Accessed: Nov. 29, 2016.
2. Bennett, "Get a quote," 2016. [Online]. Available: http://economictimes.indiatimes.com/tatapower-company-ltd/infocompanyhistory/companyid-12918.cms. power-company-ltd/infocompanyhistory/company id-12918.cms. Accessed: Nov. 29, 2016.
3. A. Verma, "Tata power to acquire NELCO’s defence sensors business," 2015. [Online]. Available: http://www.vccircle.com/news/engineering/2015/01/29/tata-power-acquire-nelcos-defencesensors-business. Accessed: Nov. 29, 2016.
4. Bennett, "Tata power company share price, NSE/BSE live stock price & company profile," The Economic Times, 2016. [Online]. Available: http://economictimes.indiatimes.com/tata-powercompany-ltd/stocks/companyid-12918.cms. Accessed: Nov. 27, 2016.
5. Bennett, "Reliance power share price, NSE/BSE live stock price & company profile," The Economic Times, 2016. [Online]. Available: http://economictimes.indiatimes.com/reliancepower-ltd/stocks/companyid-4422.cms. Accessed: Nov. 27, 2016.
6. e-Eighteen, "Tata power company stock price, share price, live BSE/NSE, Tata power company bids offers. Buy/sell Tata power company news & tips, & F&O quotes," 2017. [Online]. Available: http://www.moneycontrol.com/india/stockpricequote/power-generationdistribution/tatapowercompany/TPC. Accessed: Nov. 27, 2016.
7. [Online]. Available: https://www.tatapower.com/investor-relations/pdf/97Annual-Report-201516.pdf. Accessed: Nov. 29, 2016.
8. A. Poddar, V. Kaushal, M. Majumdar, B. Datta, and B. Rakshit, "Fuel management: Securing value across
India’s
coal
supply
chain,"
2014.
[Online].
Available:
http://www.atkearney.in/documents/10192/4694774/Fuel+Management-Securing+Value+Across+Indias+Coal+Supply+Chain.pdf/793cc9cd-b6de-4c94-afd41b50892ed136. Accessed: Nov. 29, 2016.
9. S. Singh, "Article: Tata power completes Welspun renewable energy acquisition, appoints Chetan Tolia as CEO - the economic times," The Economic Times, 2016. [Online]. Available: http://economictimes.indiatimes.com/industry/energy/power/tata-power-completes-welspunrenewable-energy-acquisition-appoints-chetan-tolia-as-ceo/articleshow/54332905.cms. Accessed: Nov. 29, 2016.
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10. EARP, "India in the COP21 on climate change, Paris, November-December 2015," 2015. [Online]. Available:
http://earp.in/en/india-in-the-cop21-on-climate-change-paris-november-december-
2015/. Accessed: Nov. 29, 2016. 11. [Online]. Available: http://timesofindia.indiatimes.com/city/mumbai/MERC-announces-revisedtariff-for-Tata-Power-Reliance-Energy-consumers/articleshow/54992239.cms. Accessed: Nov. 29, 2016 12. [Online]. Available: http://www.saveyourbill.com/index.php. http://www.saveyourbill.com/index.php. Accessed: Nov. 29 , 2016
