ICICI Securities: Maintain ‘buy’ on Tata Power, target price Rs 87

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Published: September 20, 2019 3:16:54 AM

This divestment will be a step in that direction. We also expect the Zambian subsidiary’s divestment to be closed in FY20 itself at an attractive valuation given that it is also a profitable business.

ICICI Securities, Tata Power, market news, Khopoli Investments, EBITDA, Tata Projects, Amakhala Emoyeni, market newsReduction of non-core debt continues to be a key focus area.

Tata Power (TPWR), through its wholly owned subsidiary Khopoli Investments, announced divestment of its entire 50% stake in Cennergi (Pty), a South African JV. The proposed buyer is Exxaro (the current JV partner), a leading South African coal producer, which will become the 100% owner of Cennergi. The consideration amount for the proposed sale is $106 million (~Rs 740 crore) and is expected to be completed by Q3FY20.

We expect this transaction, along with other anticipated divestments, to aid in partial repayment of TPWR’s non-core debt resulting in an earnings CAGR of 29% over FY20E-FY21E with an underlying EBITDA of ~Rs 9,900 crore, growing at 5% CAGR. We maintain our ‘buy’ rating on TPWR with a target price of Rs 87/share; the stock is trading at 0.9x FY21E P/BV.

Reduction of non-core debt continues to be a key focus area. TPWR’s total debt stands at Rs 48,900 crore, of which Rs 11,500 crore is non-core (relating to CGPL loss funding and Welspun acquisition premium). However, it has plans for asset sales and liquidation of regulatory assets to the tune of Rs 12,500 crore (excluding Tata Projects) over the next 2- 3 years. This divestment will be a step in that direction. We also expect the Zambian subsidiary’s divestment to be closed in FY20 itself at an attractive valuation given that it is also a profitable business.

Cennergi owns two wind farms in South Africa – Amakhala Emoyeni (with a generation capacity of 134.4MW and 95% shareholding) and Tsitsikamma Community Wind Farm (generation capacity: 95.3MW, shareholding: 75%). Each of them have 20-year PPA with the state power utility Eskom.

In FY19, Amakhala and Tsitsikamma wind farms operated with plant availability of 98.03% and 98.22% respectively. Cennergi’s PAT in FY19 improved on the back of higher tariffs as per the PPAs, lower interest cost due to refinancing and impact of hedge accounting in FY18.

150MW solar plant commissioned: Tata Power Renewable Energy commissioned a 150 MW solar capacity in Rajasthan, taking its overall operating renewable capacity in India to 2,628MW. The plant has a 25-year PPA at a tariff of Rs2.72/kWh with MSEDCL.

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