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Buy Tata Power Ltd For Target Rs.156

Beat on better performance of Mundra-Coal JV hedge

Renewables and EPC set to pick up; maintain Buy

* Tata Power (TPWR)’s results reflect a better-than-expected performance from the Mundra–Coal JV and a reduction in interest costs. Adj. PAT stood at INR4.3b and was significantly higher v/s our est. of INR3.6b.

* Divestment-related measures and infusion from the promoter have aided a debt reduction. Furthermore, the EPC and Renewables businesses are set to gain momentum, led by a healthy project pipeline.

* The possible benefit from the merger of Coastal Gujarat Power Ltd (CGPL) with itself presents an upside to profitability. We roll forward our valuation to Sep’23, with revised TP of INR156/sh. We maintain our Buy rating on the stock.

Profits rise on better Mundra-Coal JV performance and lower interest costs

* Adj. PAT (from continuing ops) at INR4.3b (previous year: INR2.3b) was 19% ahead of our est. of INR3.6b. The beat on our estimates was led by a better performance from the Mundra–Coal JV hedge.

* Excluding INR3b in one-time benefits at Mundra, the Mundra (EBITDA) and Coal JV (PAT) came in at INR5b (v/s INR4.8b in 1QFY21) and above our est. of INR4.4b. This was attributable to Mundra performing better than our expectations – the company restricted generation, leading to lower underrecoveries on fuel.

* Solar EPC revenues jumped ~5x YoY to INR19.5b on a strong order backlog and execution. Although, EBITDA margins stood at just 3%. Solar EPC EBITDA stood at INR 0.6b (v/s our est. of INR0.8b).

* Interest costs declined a sharp 13% YoY to INR9.5b (v/s our est. of INR9.2b).

* Odisha DISCOMs reported net loss of INR0.2b.

* RE EBITDA (TPREL + Walwhan) was higher at INR5.7b (v/s INR5.5b in the previous year), led by the transfer of S/A wind assets and offset by certain transfer charges for the same.

* Net debt has increased sequentially to INR395b in 1QY22 v/s INR381b at end-FY21.

Management commentary highlights

* TPWR noted the monetization plan for its renewable assets is still in the works. The co. is in the process of understanding the best structure and has not decided to merge the Tata Power Solar business with S/A.

* The merger of CGPL with standalone is in the final stages of hearing; the co. expects to close the process soon.

* TPWR’s Solar EPC business has been impacted by higher module prices for earlier orders where modules were yet to be purchased. However, the co. expects this to be a short-term phenomenon. New orders are factoring in higher prices, and it expects margins to improve.

* TPWR is partnering with Tata Projects to bid on good-quality greenfield projects within Power Transmission.

EPC and Renewables to drive growth; maintain Buy

* We expect Solar EPC to give a leg up in earnings for the next two years. Recent award wins, particularly from NTPC, have seen its EPC order book inflate to ~INR85b, thereby providing strong visibility. EBITDA from Solar EPC is expected to post a 30% CAGR to INR5.2b over FY21–23.

* This – coupled with the commissioning of renewable projects and the takeover of Odisha DISCOMs – should lead to a 33% PAT CAGR over FY21–23. Furthermore, the possible benefit from the merger of CGPL with itself provides an upside to profitability. We maintain Buy on Tata Power and raise our SOTPbased TP to INR156/sh (earlier: INR123/sh) – as we roll forward our valuations to Sep’23 and increase our valuation on the Renewables business to 9.5x EV/EBITDA (v/s 8.5x EV/EBITDA earlier), given the growth prospects and lower interest rates.

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