Tata Power: RE and T&D to drive growth

14 Feb 2024 , 12:51 PM

Analysts of IIFL Capital Services met with the management of Tata Power (TPWR) at IIFL’s 15th Enterprising Bharat – Global Investors’ Conference in Mumbai. Key takeaways were: 1) RE capacity additions should pick up going forward given the Govt’s policy push, falling module prices, etc; 2) Do not plan to add thermal capacity given group’s commitment to net zero; 3) Bid selectively for transmission projects under TBCB and keep eye on margins; 4) Sees privatisation of discoms as a key growth opportunity. 5) It envisages capex of ₹600-700bn through FY27 while ensuring good health and healthy financial ratios. 

Focus on RE value chain: 

TPWR aims to have 15GW+ RE operational capacity by FY27ii while being mindful of earning mid-teen Equity IRR (15- 17%) while bidding for new projects. It also eyes opportunistic acquisitions for inorganic growth. RE cap adds are set to pick up given the falling module prices, and government policy push (500GW RE target, Rooftop solar, etc). It sees a huge market opportunity in rooftop solar (30GW) where it has a 17% market share. The 4GW cell/module mfg should ramp up in FY25 which should assist in bidding for new RE projects. It doesn’t aim to add fresh thermal capacity given the Tata group’s net zero targets. 

See opportunity to scale T&D:

Given the sticky issues in the distribution sector, TPWR sees privatisation of discoms as a key measure to induce efficiencies in discom operations. It sees various state discoms to come up for privatisation over the next five years and sees it as a big opportunity for Tata Power (given success seen in T/A at Odisha). The smart metering opportunity should help cut AT&C losses for which it has installed 2.7mn smart meters in Odisha. Given the huge runway for growth in the transmission sector (₹2.5trn investment) through 2022-27, it will bid for projects under TBCB. It seeks to earn equity IRRs of 15-17% for which the project wins are muted at only ₹23bn in Q3FY24. 

Capitalising on strong financials: 

Tata Power aims to invest ₹600- 700bn through FY27 on RE, distribution, and new businesses (EV charging, Pump storage, etc) for which it targets a debt-equity mix of 70-75%. While the absolute Debt is expected to inch up, TPWR seeks to cap the Debt to Ebitda at 3.5x and Debt/Equity ratio at 1.5x (currently 1x). Given the parentage of the Tata Group, its borrowing cost is competitive at 7.8-8%.