Shedding of past legacy & focus on sunrise biz boost outlook; FY21-23e EPS up 20-30%; TP raised to Rs 95
Power demand started declining from April as economic activities were disrupted due to COVID-19.
Tata Power (TPCL) is on the cusp of a mega transformation. It is: (i) shedding the burden of legacy via deleveraging and restructuring; and (ii) realigning the business model to new ESG trends, which are both niche and scalable, to harness growth. While Street’s fixated on legacy troubles and valuing TPCL accordingly, we argue the company has outlived its past and is primed for sustainable and clean growth.
We plumb TPCL’s new opportunities ($87 bn)—renewable energy (RE), Distribution and EV—and its positioning thereof. And make a case that TPCL is powering ahead on a sustainable growth path (25% CAGR), which would drive a shift in how it is perceived and eventually spur its re-rating. Retain Buy with a TP of Rs 95 (up from Rs 75).
Cranking up growth engine: We classify TPCL’s growth into: (i) conventional/old-line and (ii) sunrise. Our proprietary work pegs the sunrise market potential at $59 bn (2x conventional) over the next three–four years, but TPCL’s market share thereof would probably lag its share in the conventional market. Overall, more than 70% of the incremental
PAT (excluding interest cost reduction) would be sunrise-driven.
Importantly, growth would be ESG-accretive, contrary to Street’s perception. We expect CESU/EPC to make good the likely loss of Rs 25 bn in renewable InvIT revenue, and thermal revenue mix to reduce by 10% to 38% in FY23. Deleveraging and restructuring: The last decade for TPCL was marred by debt/valuation trap owing to various factors.
The company is now on track to shed its dubious tag of a ‘high leverage and complex company’. Its corporate DNA has mutated with disentangling of operations and deleveraging (to be slashed by 50% by Mar-21). After paying down Rs 40 bn in external debt, Mundra is broadly self-sustainable, and, should coal prices not spiral (low odds in our view), the CT issue stands relegated.
Outlook: Sunrise powering growth— In this note, we argue that Tata Power is the most comprehensive player in the entire renewable/EV chain. We forecast the sunrise business PAT mix at 40–45% by FY23. We are raising the TP to Rs 95 assigning a higher valuation to renewable EPC (Rs12/share) and developer renewable (Rs 18/share), and incorporating the Odisha distribution business (Rs 6/share) owing to stronger execution and peers’ valuations. Accordingly, we are raising EPS by 20–30% for FY21–23e. Our earnings forecast/target price is 15/30% higher than consensus, and we expect consensus to follow suit, similar to the past. We maintain ‘BUY/SO’.