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.
While we acknowledge Tata Power’s commendable progress in the renewable energy transition, with green earnings expected to surpass coal/thermal by FY27–28, the company faces near-term growth limitations. Our assessment suggests limited upside potential, even in our Bull case scenario, which factors in (i) CGPL’s Sec-11 benefit persisting indefinitely, (ii) $130/T of long-term coal prices from FY27E, and the optional value of pump hydro. In light of these considerations, we maintain a ‘Hold’ recommendation with a revised SoTP-based TP of Rs 242. This adjustment accounts for the rollover to FY26 Book Value (BV).
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.