We maintain ‘buy’ on Tata Power and revise our target price to R97 per share (earlier R99) factoring in equity dilution after the rights issue. Tata Power’s financial health is set to improve due to CERC’s recent compensatory tariff order, Arutmin stake sale and the current rights issue. Hence, we expect the management to start working on growth plans. As the stock is trading at ~20% discount to our revised target price, we recommend ‘subscribe’ to the rights issue.
Tata Power has set a price of R60 per share for its proposed ~R2,000 crore rights issue. Seven shares will be issued for every 50 shares held, resulting in issue of 332.2 million fresh shares (~14% dilution). The document is expected to be filed by March 20 and the rights issue will open before March 31 (will remain open for a minimum period of 15 days). Issue proceeds will be utilised for Mumbai licence area capex, debt repayment and other general corporate purpose. After the CERC compensatory tariff for Mundra project, we believe Tata Power is comfortably placed to start evaluating growth plans.
The management has cited objects of the rights issue as funding Mumbai licence area capex, repayment of debt and general corporate purpose. While management is not vocal about future capex, we believe Tata Power will start looking at growth plans, especially after the CERC relief for Mundra project, which had been a major drag on the company’s financial health.