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Solid quarter; Outlook improved

The Tata Power Company Limited generates and supplies electricity. The Company constructs and operates independent power plants, as well as specializes in transmission and distribution of electricity. Tata Power Company delivers its products and services in India.

* Revenue up 53.0% YoY in Q4FY21 on all-round improvements seen in both B2B & B2C verticals and across its generation, transmission and distribution operations.

* EBITDA margins remained under pressure declining 11.3pps YoY to 15.2% on higher costs and lag in price hikes.

* Company acquired four licenses for retail power distribution in Odisha, thereby expanding its total customer base to over 11.7mn. With improved outlook, we upgrade our rating on the stock to BUY with a revised target price of Rs. 120 based on 17x FY23E adj. EPS.

Demand drives topline growth

Q4FY21 consolidated revenue rose 53.0% YoY to Rs. 10,127cr, aided by growing demand across businesses and operations, with the company having recently acquired retail power distribution rights in the state of Odisha. EBITDA declined 12.1% YoY to Rs. 1,541cr on significant increase in raw material (+701.2% YoY) and employee (+93.6% YoY) costs. As a result, EBITDA margin contracted to 15.2% vs. 26.5% in Q4FY20. Benefiting from lower interest expenses and tax gains, adj. PAT grew to Rs. 483cr vs. Rs. 82cr in prior year period.

Key concall highlights

* Company has set targets of generating revenue of over Rs. 27,000cr in FY25, with capex spends of Rs. 15,000cr over the next 5 years.

* Management expects EBITDA margins to improve substantially with new orders factoring in price hikes, while existing orders may undergo some headwinds temporarily till completion.

* On the EV front, the company tied up with OEM partners to provide home charging facilities to EV car buyers. On the other hand, it has set up close to 500 public charging points in nearly 100 cities and plans to expand to over 3,000 charging points in the next one year. It has also collaborated with fleet owners which serves as an assured revenue model.

Renewable energy unit IPO in the works

Company expects to raise just over Rs. 3,500cr by listing its renewables business. Currently, TATA Power has 12.8GW generation capacity, of which around 30% comes from renewable portfolio, consisting of wind and solar projects. The existing plan is in the works as per management and to be presented soon to its board for approval as it looks to list it sometime during the current fiscal year.

Valuation

Company has a stated target of going net carbon zero by 2050, as it looks to rapidly increase its green energy portfolio, while simultaneously also putting an end to plans for setting up any new coal-based plants. With rapidly growing generation capacity at its disposal, strengthened focus on EV and renewables businesses, and some of its loss making facilities witnessing a turnaround, we expect company’s performance to improve from hereon with margins expected to expand significantly from current levels.

We estimate EBITDA margin to improve to 23.1% by FY23E and hence PAT to grow at 34.9% FY21-23E CAGR. With improved outlook, we upgrade our rating on the stock to BUY with a revised target price of Rs. 120 based on 17x FY23E adj. EPS.

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