Tata Power: Going Green all the way!

29 Nov 2023 , 10:52 AM

Recommendation: Reduce; Target Price: 218

Tata Power (TPWR) plans to invest Rs600bn in clean energy, distribution, etc through FY27 to double its PAT; it is confident of scaling up its clean energy (RE/PSP/EV charging) portfolio to 15GW on back of differentiation, vertical integration, Govt policy etc. It also hopes to gain from pick up in distribution reforms; in the near term completion of cell/module facility + extension of S/11 >Q1FY25 are key triggers for the stock. Await a better entry point. 

Upbeat on sector:

TPWR expects steady demand growth on back of revival in economic activity + rapid urbanisation which will necessitate investments in G/T/D; Govt’s RE targets (500GW by 2030), can be achieved with stringent RPO mandates; the RE tariffs are bottoming out; favourable trends in module / WTG should improve project IRRs; the industry should focus on complex RTC/hybrid + storage units for superior returns; post elections parallel licencing is expected to pick up; smart metering is a good opportunity, but frequent change of terms by SEBs, is an issue. 

Target FY27: capex Rs600bn, 2x PAT: 

Regardless of Govt’s call, TPWR will not invest in thermal assets; by 2045, 100% portfolio should be green; its growth would be driven largely by distribution, and clean energy verticals. In all, it plans to double its PAT (before MI) by investing Rs600bn in clean energy, transmission and distribution projects. It plans to scale up its RE portfolio from 4GW to 15GW by FY27; to enhance the returns, it is targeting to scale up C&I segment (1GW tied up within Tata group); it can potentially add 2.8GW PSP (construction period of 4-5 years + capex of Rs130bn), which should earn >regulated rate of return; the 4.3GW solar cell/module facility should be complete by Q1FY25, and earn at least IRR of >15% (invested Rs40bn); risk of changes in BCD structure is low. 

Impressive plans, execution holds key: 

Analysts of IIFL Capital Services are impressed by TPWR’s strategy to de-risk revenue model and drive growth through clean energy; the company may however have to raise capital at opportune time to fund its asset heavy growth plans. In the near term, scope for earnings upgrade is high, as energy deficit may compel Govt to extend S/11 > Q1FY25, which remains one of the key triggers for the stock, others being pick up in coal prices and RE execution. The stock’s rich multiples may sustain, provided, Mundra PPA is changed at favourable terms and execution surprises on RE projects. Analysts of IIFL Capital Services maintain earnings, and await better entry point.