Tata Power Company Rating- Add - Best-placed pvt company in sector

Tata Power Company Rating: Add | Best-placed pvt company in sector

We attended Tata Power Company’s (TPWR’s) analyst meet during which the company highlighted the growth strategy for its several businesses over FY23-FY27. TPWR has a clear focus on clean and green growth as is evident from the fact that 80% of the estimated Rs 1-trn capex over FY23-FY27 will be on green businesses. With this, the company aims to grow its revenue and PAT 3x and 4x from the FY22 levels of Rs 426 bn and Rs 23 bn, respectively, and simultaneously improve shareholder returns. Apart from the 5-year green business targets to improve its leadership positions [helped by the receipt of Rs 20 bn from Tata Power Renewable Energy (TPREL) stake sale], we expect TPWR to be among the key players in the T&D space. Debt reduction and elevated coal prices paint a positive picture for Coastal Gujarat Power (CGPL) and the coal businesses. Since provisioning and write-offs are now complete for both Tata Projects and Tata Power Solar Systems (TPSSL), we believe they should turn around from Q2FY23E onwards. Easing of commodity prices and domestic contract manufacturing arrangements for TPSSL will also help.

Targets 4x growth in PAT by FY27: Over FY23-FY27, TPWR targets taking its capital employed from Rs 656 bn at FY22- end to >Rs 1.6 trn. Simultaneously, TPWR is focusing on improving both RoE and RoCE to >13% and >11% from the current 8.5% and 8.9%, respectively. Debt sustainability will be key to ensuring the company’s growth strategy leads to good returns for investors. TPWR’s aim is to keep its debt/ equity at <1.5x and debt/Ebitda at <3.5x.

Clear transition towards clean energy: TPWR targets to increase its utility-scale capacity to >20 GW by FY27, adding 3 GW of capacity annually over the next five years. With TPREL now established and cash-rich post the recent investment, we expect its RE bidding success rate to improve. For the solar EPC business, the target is to increase the revenue from Rs 60 bn p.a. currently to Rs 200 bn p.a. by FY27 with a market share of 23% (15% in FY22).

TPWR to be a key player in the T&D segment: TPWR targets to expand its distribution footprint to 40mn customers by CY27. It will also pursue smart meter opportunities and distribution services. Company will leverage its turnaround experience in upcoming privatisation opportunities in states. It will also be a key participant in the transmission sector (expected bid pipeline of Rs 870 bn over the next three years), as it has Tata Projects as its EPC partner which has strong credentials for such projects.

Valuations and outlook: We maintain our SoTP-based target price of Rs 262 on TPWR, but downgrade the stock to Add (from Buy) due to stock price run-up (12.3% over past 6M). We believe the long-term potential of the company’s businesses is good, especially its renewables and distribution businesses, and that the company is the best-placed private player in the power sector, with businesses across the value chain and backward integration.