We maintain our positive stance on Tata Power (TPWR) on a combination of four factors –(i) robust earnings growth outlook; improving RoE and FCF augmentation; (ii) benign valuation offering headroom and, at FY19F 1.2x P/B (BVPS = Rs 67.8) and 12x P/E, multiples are in-line or a bit below domestic and regional peers; (iii) overhang of no tariff relief for Mundra has played out and is now behind us, concerns on valuation and timeline for exiting PT Arutmin are allayed; and (iv) strong likelihood of TPWR finally monetising non-core investments/cross-holdings to deleverage and strengthen its consolidated balance sheet. Moreover, our SOTP-based fair value of TPWR’s multiple businesses and investment portfolio suggests that the stock is undervalued. Maintain Buy; our 12-month target price offers 19% potential upside.
We expect FY17-FY19F Ebitda/NPAT CAGR of 12/36%
We expect earnings growth to be driven by halving of net loss at Mundra, greater contribution from coal business (realisation to moderate, but spreads to be resilient, as seen historically) and rise in profits of the renewables portfolio. We cut our FY17F/18F Ebitda forecast by 33%/25%; our FY17F/18F NPAT forecast is cut by 30%/8%. Our NPAT forecasts are sharply below mean consensus forecasts.
We maintain our Buy rating on TPWR and raise our 12-month TP for the stock by 15% to Rs 98/share, implying a 19% potential upside from current levels. Methodology is unchanged, but CoE lowered (drop in risk-free rate), discounting period rolled forward and WRE buyout included. Target price (Rs 98) = power (Rs 60.7) + coal (Rs 11.3) + SED/solar (Rs 3.4) + value of investments (Rs 22.2). Our positive stance is premised on a healthy earnings outlook (FY17F-19F normalised EPS CAGR of 36%), headroom in valuation multiples (1-year forward P/B is 1.3x vs. 3-year/5-year average of 1.4x/ 1.6x and, at FY19F 1.2x P/B and 12x P/E, book/earnings multiples are in-line or marginally below domestic/regional peers) and increased likelihood of TPWR finally monetising its non-core investments/ cross-holdings.
Following a 16% rise in the stock price over the past 12 months (in-line with a 17% rise in the BSE Sensex over this period), overhang of Supreme Court disallowing any tariff relief for Mundra UMPP now being behind us, and our recent interactions with the management on several strategic and financial issues, we revisit our earnings forecast and investment thesis for Tata Power . In summary, we maintain our Buy rating on the stock.