Rating: BUY | Stagnant to modest growth for Tata Power

By Nuvama Research

In Q2FY24, Tata Power (TPWR) recorded a consolidated PAT of Rs 8.75 billion (after minority interests), reflecting a 7% y-o-y increase. The decline in coal profits was mitigated by positive developments such as (i) CGPL turning PAT positive (operating under Sec-11), (ii) higher PAT in solar EPC/Odisha discom, and (iii) reduced losses in Tata Projects.

TPWR reported a PAT that exceeded expectations, marking a 7% y-o-y increase, primarily attributed to the profitability of CGPL (Mundra UMPP) under extended benefits until Jun-24. We anticipate the continuation of these benefits for the next two to three years, pending a long-term resolution. Despite an 87% y-o-y decline in estimated coal profits to Rs 1.4 billion due to decreasing coal realisation, this was counterbalanced by increased profits in CGPL, Maithon, RE, and Odisha distribution, coupled with reduced losses in subsidiaries.

The management anticipates the commencement of solar module/ cell production by Jan-24/Q4FY24, with a trial run already in progress. TPWR has entered into an MoU with the Maharashtra government for the brownfield development of 2.8GW pumped hydro storage at its existing hydro assets, with an expected commissioning of delivery (CoD) by FY27-28. The FY24 capex plan, amounting to Rs 120 billion pertains to green energy and T&D business.

Odisha distribution performed well with a 45% y-o-y increase in PAT, attributed to a reduction in T&D losses. The solar EPC division achieved a 6.7% Ebitda margin, boasting an order book of Rs 159 billion from both external clients and captive contracts. RE pipeline currently stands at 3.5GW, and the recent RE tendering by the ministry of power (MoP) could lead to substantial additions to TPWR’s pipeline. As of H1FY24, net debt is Rs 366 billion, maintaining a healthy net debt-to-equity ratio of 1.02x. Our SoTP valuation ranges from Rs 225 to 271, considering (i) a HBA coal index assumption of $120-130/T, and (ii) CGPL’s Sec-11 benefit until FY27 or perpetuity.

We expect Tata Power to experience stagnant to modest growth in FY24-25E due to declining coal realisations. The increasing contribution of RE is anticipated to unfold over the next two to three years. We are closely monitoring potential growth opportunities, including pumped hydro, Commercial and Industrial Power Purchase Agreements (C&I PPAs) with the Tata group for renewable energy, and the prospect of new distribution privatisation.