Tata Power’s stock has had a rough week. It slipped nearly 8% after an unfavourable order in an ongoing arbitration case called Kleros.
However, the brokerage house Nuvama believes the recent correction has done much of the work of pricing in the risks over the near-term . The brokerage has therefore upgraded the stock to ‘Buy’ and retained a target price of Rs 421.
What changes the investment case from here? According to Nuvama, the key drivers are threefold – the risk from the Kleros case now being largely reflected in the stock, the value of Tata Power’s pumped storage and transmission pipeline, and the potential from its Bhutan hydroelectric projects.
Kleros risk may already be priced in
The immediate overhang for Tata Power is the Kleros arbitration case. The stock corrected around 8% after the adverse ruling last week.
Nuvama estimates that the company could face a cash outgo of around US$490 million to US$640 million, which translates to roughly Rs 20 per share at the higher end.
The brokerage has also built a bear-case target of Rs 363, assuming Tata Power loses the final appeal and has to bear the full liability.
Nuvama said, “CMP < Bear Case target price of Rs 363; overhang largely priced in.”
In this scenario, the brokerage also assumes around Rs 50 billion of additional debt to support Tata Power’s planned capital expenditure.
Pumped storage could unlock fresh cash flow
Tata Power has a 2.8 gigawatt pumped storage project (PSP) portfolio. The brokerage believes timely commissioning of these projects could add around Rs 6 billion in annual cash flow.
The value of this opportunity is not fully reflected in its base valuation, according to Nuvama.
It has added Rs 14 per share for the pumped storage portfolio in its bull case. The brokerage expects the projects to become more important as the market starts looking towards FY29 and beyond.
Nuvama said, “Timely commissioning of 2.8GW PSP can add ~Rs 600 crore in annual cash flow and lead to re-rating once the street rolls over to FY29.”
Transmission and Bhutan projects add another layer
Tata Power also has a sizeable transmission pipeline. Nuvama values the company’s existing Transmission System Strengthening through Tariff Based Competitive Bidding (TBCB) work-in-hand at around Rs 12,500 crore. It has assigned Rs 19 per share for this existing pipeline.
Future TBCB wins could provide another Rs 19-20 per share of potential value, although these are not included in the brokerage’s current sum-of-the-parts (SoTP) valuation.
Then comes Bhutan. The Khorlochhu hydroelectric power project (HEP) is being developed through a 60:40 joint venture between Tata Power and Druk Green Power Corporation. The project has achieved financial closure.
Nuvama values Tata Power’s committed equity in the project at Rs 830 crore, adding around Rs 4 per share to its valuation.
Why Nuvama has turned bullish now
The brokerage has raised its target from Rs 400 to Rs 421 in its bull case, while leaving its earnings estimates unchanged.
It said, “Upgrade to ‘Buy’ from ‘Hold’ given the stock has fallen 8% since the adverse Kleros arbitration ruling last week.”
Nuvama believes the correction has reduced the valuation risk while leaving medium-term growth opportunities underappreciated.
The stock currently trades at around 2.4 times price-to-book value (P/B) and 22 times FY28 estimated earnings per share (EPS).
Disclaimer: This article is based on research reports from one or more brokerage firms and is for informational purposes only. The views, target prices, and recommendations expressed are those of the respective brokerage firms and do not reflect the official policy or position of Financial Express. This should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor before making any investment decisions.