Published on 31/10/2020 1:51:33 PM | Source: Emkay Global Financial Services Ltd

Buy Tata Power Company Ltd For Target Rs.73 - Emkay Global

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Empowered for a brighter future; initiate with Buy

* Mundra UMPP losses have been whittled down substantially - now account for -11.2% of EBDITA - and as the latter grows, the drag will be lower. Incremental investment will be directed to regulated assets (generation/T & D) with predictable returns or where Tata Power has the right to win (distribution licenses & renewables). By FY25, unproductive capital tied to Mundra should decline to just 17% of b/s size.

* Regulated equity should rise to Rs135bn by FY25E from Rs73bn in FY20 - powered by a near Rs200bn capex in the low-risk transmission and distribution business. As state finances are crunched, more licenses should get quasi or fully privatized – Tata Power has a head start here, in our view.

* Conservatively, India will add 16-18GW of capacity each year. Captive EPC and competitive funding costs will sustain Tata Power’s 18-20% share in these segments. Our calculations reflect a healthy 12-14% IRR which will be offloaded profitably to an InvIT structure and gains rolled over into newer build-outs.

* Renewable InvIT and non-core asset sales will significantly de-risk the balance sheet, with net debt/equity estimated at 1:1 by FY23E. Earnings growth will be super-charged – rising 41% through FY23 with significant and sustainable improvement in ROEs. We initiate coverage on Tata Power with a Buy rating and a SoTP-driven TP of Rs73.


* Re-allocating capital to predictable businesses: Mundra’s resolution, along with b/s de-leveraging, essentially re-directs cash-flows to more predictable regulated businesses of power and distribution. Tata Power’s targeted capex of Rs200bn will demand an equity infusion of Rs60bn through FY25. Over FY20- 23E, we expect a regulated equity investment of Rs22.9bn (CAGR: 9.5%) which should drive its regulated PAT at a 9.7% CAGR through FY23 (mirroring the growth in regulatory equity).

Tata Power also plans to add 2GW of solar assets each year - eyeing 18-20% of the addressable market. Tata Power’s captive EPC arm and competitive funding costs give it an edge over competitors. Our detailed model proves IRRs of about 12-14% are possible. These could be serially offloaded profitably to an InvIT vehicle and gains rolled over into newer build-outs.

The EPC opportunity in solar is a less crowded space and hence more profitable. We estimate that revenues of Tata Power’s EPC business will witness a 54.4% CAGR and PAT will record a 46.8% CAGR over FY20-23E – contributing 13.6% of its FY23 consolidated PAT

D/E should fall to 1.3x in FY21-end from 2.5x in FY20 with InvIT formed. This, along with fresh capex in regulated and renewable businesses, should reduce the share of capital allocation in Mundra and coal assets to 17% in FY25 (35% in FY20). Revenue, EBITDA and PAT should see 6.5%, 6.5% and 41.3% CAGRs over FY20-23E. PAT growth will be driven largely by interest-cost savings (on a reduction in gross debt to Rs292bn via InvIT), promoter fund infusion, divestment of non-core assets, and Mundra tariff resolution. RoE should increase to 11% in FY23E from 8.1% in FY20

We initiate coverage on Tata Power with a Buy rating, factoring in growth in renewable and regulated businesses, Mundra resolution, debt reduction and merger benefits. We assign a TP of Rs73 - 39% upside from CMP.



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