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RE business stake divestment to bring in growth capital

Tata Power (TPWR) has concluded the long-awaited divestment of stake in its renewables (RE) businesses. It has consolidated all its RE businesses under one holdco – TPREL – and will be raising Rs40bn by offloading 10.53% stake in the same to GreenForest New Energies Bidco Limited (UK), a consortium of BlackRock and Mubadala, all of which will be used as growth capital for TPREL. As per our calculations, the transaction will be at an EV of ~Rs520bn-530bn, with pre-money equity valuation of Rs340bn. As per our estimates, the RE business has been valued at ~12x EV/EBITDA on full capacity commissioned basis (average of our FY23E/FY24E estimates). Though, it is higher than the valuation normally ascribed to a renewable company that listed recently through IPO, we believe, at CMP, the deal is priced-in. Yet we believe the long-term potential of TPWR's businesses is high as it is best placed to participate in RE capacity addition programme of GoI and any discom privatisation. We reinitiate our coverage on TPWR with a HOLD rating and a target price of Rs262. Mundra resolution and RE tendering & ordering pick-up are key near-term drivers.

Details of the deal: TPWR will be raising Rs40bn (~US$525mn) by offloading 10.53% stake in its renewables arm – TPREL – to GreenForest New Energies Bidco Limited (UK), a consortium led by BlackRock Real Assets with Mubadala Investment Company at a premoney equity valuation of Rs340bn. Investment will be in two tranches. First tranche of Rs20bn will be received through issuance of equity shares at Rs235.38/sh in the next 2-3 months (closing date of transaction). Second tranche of Rs20bn will be received by Q1FY24 through issuance of 200mn compulsorily convertible preference shares at Rs100/sh. The final shareholding range (9.76%-11.43%) at the time of conversion into equity shares will be based on TPREL’s EBITDA performance in FY23. Thus, the postmoney equity valuation may be in the range of Rs310bn-Rs370bn. The valuation arrived at (12x FY23E/FY24E average EV/EBITDA as per our calculations) is a composite valuation of the total RE portfolio. At a net worth of Rs68.1bn as at 9MFY22-end for the consolidated RE business, the deal is valued at 5x P/B. Proceeds will be used for investment in growth of the RE businesses under the platform and no part of the proceeds will accrue to the parent TPWR for deleveraging or any other purposes. As per the management, there is no requirement for raising further capital for TPREL on the horizon. Further, no conditions have been put by GreenForest for IPO of TPREL. GreenForest will have the right to nominate one director and one observer on the board of TPREL and its material subsidiaries. Since this transaction is a primary issuance by TPREL, there are no capital gains, hence no tax incidence.

Consolidation of all RE businesses under a single holdco, TPREL, which will be the platform for all future RE business executions: TPREL will be the holding company of all RE verticals. Five RE business verticals under the holdco TPREL will be: 1) utility-scale solar, wind and hybrid generation assets; 2) solar cell and module manufacturing; 3) EPC contracting; 4) rooftop solar infrastructure; 5) solar pumps and EVC infrastructure. All future RE ventures of TPWR will be undertaken through the TPREL platform.

Huge growth opportunity for the RE business going ahead:

Utility-scale RE: Currently, TPWR’s utility-scale RE portfolio includes 3.3GW of operational and 1.6GW of under-implementation capacity (totaling 4.9GW), majority to be commissioned in FY23. TPWR targets to reach a portfolio of 20GW of RE capacity by FY25. While the opportunity is huge as India targets 500GW of RE capacity by CY30, translating to >30GW of annual opportunities, traction in this space (as well as in solar EPC) will build once the auctions pick speed.

Solar cell and module manufacturing: Tata Power has >30 years of manufacturing experience in modules and cells (includes experience in mono PERC technology). It currently has 550MW of solar cell and 650MW of solar module manufacturing capacity operational. Further, it is planning to set up another 4GW of solar cell + module manufacturing capacity in a single phase in the next 18 months. TPWR has already identified the land with necessary infrastructure in place. Majority of production from this unit will be for captive consumption. Additionally, the company expects to benefit from solar manufacturing PLI incentives of the GoI amounting to Rs15bn over the next five years.

EPC contracting: TPSSL is among the largest solar PV EPC companies in India. It is targeting revenues of >Rs120bn by FY25 with a market share of ~20% vs Rs27.8bn in FY21. Its orderbook as of FY22-end was 3,250MW (LoA awaited for 2GW of projects, including captive), to be commissioned over the next 12-18 months. Company expects a steady-state EBITDA margin of ~10% for this business. TPSSL is also executing India’s largest solar and battery storage project of 100MW in Chhattisgarh.

Solar rooftop and solar pumps: In FY22, TPWR had 553MW of solar rooftop order wins and 73MW solar rooftop capacity under PPA model (including under-construction projects). Further, it installed ~28,500 solar pumps in FY22 vs 12,928 in FY21, up 2.2x, through government tenders as well as direct sales. Rooftop solar and solar pumps (through the KUSUM scheme) are expected to get a lot of push from the government going forward. Empanelment under PM KUSUM Scheme-2, which was pending due to litigations till Dec’21, has also started. In the solar rooftop space, the company expects group captive opportunities, apart from retail and commercial installation, to be some of the large-scale opportunities going forward.

EVC infrastructure: Tata Power has installed >15,000 EV chargers cumulatively till date – 13,107 home chargers, 1,871 public chargers, 212 bus chargers and 136 captive (fleet) chargers – under the brand name TATA Power EZ Charge. Company has a first-mover advantage in the EVC business. It is looking for more strategic tie-ups with EV manufacturers, oil companies, mobility partners & builders, and development of franchise network. Company’s recent tie-ups in the EV infrastructure space include:

MoU with TVS Motor Company to collaborate in electric two-wheeler charging ecosystem in India

Partnership with Apollo Tyres to deploy charging stations at its vehicle zones across India

Tata Power and Amã Stays & Trails have collaborated to set up EV charging stations to promote greener tourism

Current valuations of TPWR price-in the deal: We reinitiate our coverage on TPWR with a HOLD rating and a target price of Rs262. The stock is currently trading at FY24E P/E of 29.6x and P/B of 3.3x. At fully commissioned RE capacity, the deal is valued at ~12x EV/EBITDA (average of FY23E/FY24E EBITDA, assuming full commissioned capacity over the next two years), which we believe, at CMP, is priced-in. Yet we believe the long-term potential of the company's businesses are high and TPWR is the best-placed private player in the power sector, with businesses across the value chain. We recommend entering the stock at a lower price vs CMP of Rs273/sh. Mundra resolution and RE tendering and ordering pick-up are the key near-term drivers.

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