Tata Power rating: Maintain ‘buy’ with revised fair value of Rs 70

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August 21, 2020 5:10 AM

Tata Power laid out its five year target to double its revenues (Rs 289 bn in FY2020) and triple its profits (Rs 12 bn in FY2020), while nearly halving its debt to Rs 250 bn (from Rs 436 bn as of March 2020).

Maintain ‘buy’ with revised fair value estimate of Rs 70/share (from Rs 62/share).Maintain ‘buy’ with revised fair value estimate of Rs 70/share (from Rs 62/share).

Cleaner, leaner, greener. Tata Power hosted its annual investor meet highlighting its growth aspiration through step-up increase in revenue contribution from the renewable business, deleveraging its balance sheet through divestments, equity raise and proposed InVIT for releasing fresh capital and resolution of Mundra and merger of companies with the parent company to derive maximum fiscal efficiency. Maintain ‘buy’ with revised fair value estimate of Rs 70/share (from Rs 62/share).

Tata Power laid out its five year target to double its revenues (Rs 289 bn in FY2020) and triple its profits (Rs 12 bn in FY2020), while nearly halving its debt to Rs 250 bn (from Rs 436 bn as of March 2020). More importantly, TPWR intends to achieve this growth through a 6X increase in revenues from its renewable business — a combination of increase in renewable capacity to 15 GW (from 2.5 GW currently) as well as higher project execution revenues of Rs 220 bn from Rs 21 bn currently.

Management highlighted that they will not put up any more coal-based capacities, and will look to de-commission extant coal-based capacities that complete their useful life as well as tenure of their PPAs. Reduction in net debt is premised on asset monetisation of Rs 45 bn in FY2021E (Rs 18 bn achieved upto 1QFY21), and listing of the renewable InVIT by Q4FY21 that will help take away external debt of Rs 110 bn as well as equity infusion of Rs 26 bn by the promoters through a preferential issue. Further, a large part of the incremental capex (Rs 600 bn) will be under the renewable asset portfolio, wherein the capital will be recycled, by down-selling to the InVIT structure with overall asset sale proceeds of Rs 300 bn (InVIT + non core).

Our investment thesis on Tata Power was premised on compensation for under-recovery of fuel cost at Mundra (Rs 0.45.kwh in 1QFY21), monetisation of non-core assets wherein the company has realised Rs 18 bn and targets Rs 45 bn in FY2021E, and listing of renewable InVIT that would help ease the consolidated debt on Tata Power’s balance sheet as well as realise surplus depending on listing valuations. The investment thesis is strengthened by merger of Coastal Gujarat Power (Mundra UMPP) that will help utilise the unabsorbed losses of Rs 180 bn as well as provide a tax off-set on continuing losses to profits of the standalone business as well as Tata Power Solar and dividends from coal mines and InVIT, aggressive growth plans for the renewable portfolio and regulated distribution business., while stating a zero-carbon footprint policy by FY2021E that will help improve the sustainability score of the company. Our earnings and fair value estimates do not factor the growth target in the renewable as well as distribution business, and we will review the progress of the company on stated targets.

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