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Analyst meet highlights

We attended Tata Power Company’s (TPWR) analyst meet during which the company highlighted the growth strategy for its several businesses over FY23-FY27. TPWR has a clear focus toward clean and green growth as evident from the fact that 80% of the estimated Rs1trn 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 Rs426bn and Rs23bn respectively, and simultaneously improve shareholder returns. Apart from the 5-year green business targets to improve its leadership positions (helped by the receipt of Rs20bn from TPREL stake sale), we expect TPWR to be among the key players in the T&D space, participating in upcoming discom privatisation as well as transmission TBCB bids. Debt reduction and elevated coal prices paint a positive picture for CGPL and coal businesses currently (company may eventually sell off its coal mines). Since provisioning and write-offs are now complete for both Tata Projects and TPSSL, we believe they should turnaround from Q2FY23E onward. Easing of commodity prices and domestic contract manufacturing arrangements for TPSSL will also help

Targets 4x growth in PAT by FY27 with much healthier returns profile: Over FY23- FY27, TPWR targets capex of Rs1trn, taking its capital employed from Rs656bn at FY22- end to >Rs1.6trn by FY27. 80% of the capex is targeted at green businesses including utilityscale RE and solar manufacturing, while 17% is intended to be spent in the T&D businesses. With this, the company aims to increase its revenue and PAT 3x and 4x from FY22 levels of Rs426bn and Rs23bn respectively. 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 ensure that the company’s growth strategy leads to good returns to investors. TPWR’s aim is to keep its debt/equity at <1.5x and debt/EBITDA <3.5x

Clear transition towards clean energy; aims to further improve its leadership position in several green businesses: TPWR targets to increase its utility-scale capacity to >20GW by FY27, adding 3GW of capacity annually over the next five years (2GW utility scale and 1GW rooftop and C&I). With the company’s green platform, 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 Rs60bn p.a. currently to Rs200bn p.a. by FY27 with a market share of 23% (15% in FY22). For solar rooftop, pump and EVC businesses, the aim is to further improve its current market leadership position

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 including Jharkhand, MP, Rajasthan, UP, and the UTs of J&K and Ladakh. It will also be a key participant in the transmission sector (expected bid pipeline of Rs870bn over the next three years), as it has Tata Projects as its EPC partner which has strong credentials in executing transmission projects.

Valuations and outlook: We maintain our SoTP-based target price of Rs262 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.

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