Buy Tata Power Ltd For Target Rs.442 by Motilal Oswal Financial Services Ltd
Diversification drives resilience; Kleros risk priced in
* The stock has declined 27% over the past six months despite strong FY27 earnings momentum. We model ~34% YoY growth in FY27 PAT, led by a sharp reduction in Mundra losses to ~INR4b (from ~INR10b in FY26), aided by the Section 11 extension and subsequent SPPA framework, higher earnings from the Indonesian coal business (every USD10/t rise in coal realization adds ~8-10% to TPWR’s FY26 PAT), continued strong profitability at TP Solar backed by >90% cell utilization and third-party cell sales, and the commissioning of ~2GW of captive RE capacity.
* CMP implies attractive valuation for the RE business: At CMP, TPWR’s RE business trades at ~8x FY28E EV/EBITDA on our estimate, making it one of the cheapest listed RE plays. The valuation appears attractive given the company’s diversified RE footprint, high utilization at its solar module and cell manufacturing facilities, financing cost advantage in RE generation backed by a strong PPA-backed project pipeline, and a leading ~14% market share in solar rooftop.
* Strong IPP commissioning momentum: Execution remains robust, with ~700MW commissioned in 1HFY27. We believe the company is set to achieve its ~2GW commissioning guidance in FY27 vs. ~1.2GW of organic capacity commissioned in FY26.
* Kleros arbitration remains an overhang, but largely priced in: The Kleros case remains a key overhang, with the company likely to challenge the judgment. While Kleros has sought USD490m in damages, this represents the amount claimed and the final liability could be significantly lower. We believe the uncertainty is largely reflected in the current stock price.
* Indonesian coal business offers meaningful earnings upside: TPWR’s 30% stake in the Indonesian coal business provides meaningful earnings leverage, with every USD10/t increase in coal realizations translating into ~INR4b of incremental PAT, equivalent to ~10% of FY26 PAT. Geopolitical uncertainties could keep coal prices elevated over the coming quarters, supporting continued strong profitability from the business.
* We reiterate our BUY rating on the stock with a TP of INR442.
Mundra: From INR10b loss to ~INR4b, with a path to breakeven
* Mundra is the key driver of FY27 earnings growth, with an estimated ~INR6-8b PAT uplift from narrowing losses at the 4,150MW imported-coal plant.
* Mundra resumed full 4,150MW operations on 1st Apr’26 under Section 11 directions from the Ministry of Power, initially extended until 30th Sep’26 and subsequently until 31st Dec’26.
* We estimate Mundra losses to decline to ~INR4b in FY27 from ~INR10b in FY26, supported by the Section 11 extension and the subsequent transition to the SPPA framework.
* The SPPA with GUVNL has been signed, while approvals from other procuring states are expected shortly.
Key risks
* Kleros: a provision or an adverse appeal ruling that costs more than we assume.
* Mundra: Section 11 lapses after Dec’26 with no long-term SPPA in place.
* RE execution: transmission delays, especially for 2H wind projects, push commissioning into FY28.
* Manufacturing: module prices decline, or cell sales to third parties shrink faster than expected.
* Coal: a sharp fall in seaborne coal prices; each USD10/t is worth ~INR4b of PAT.
Valuation and view
The valuation of TPWR is segmented across various business units:
* The regulated business is valued using a 2.5x multiple on regulated equity.
* The coal segment is valued at 1x book value.
* The renewables segment is valued at 12x FY28E EBITDA.
* The pumped storage segment and other segments are valued at 1x PB. Cash and investments add INR69/share.
* The sum of these contributions results in a TP of INR442/share, reflecting the comprehensive valuation of TPWR’s diverse business segments.
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
