IGI Logo

The Great Recalibration: Upgrade to BUY

Tata Power's recalibrated strategy involves tapping high-margin group captive RE (renewables) opportunities, exiting low-value businesses, venturing into brownfield pumped hydro storage, and expanding transmission business beyond distribution. This, coupled with the visible resolution of the Mundra issue, positions the company for accelerated growth. We forecast Revenue/EBITDA/Adj PAT CAGR of 15%/26%/21% respectively over FY23-26E, supported by increasing asset base and improved margin profile. We upgrade the stock’s rating to BUY, setting an SOTP-based TP of INR 350, indicating a potential upside of 24% from current levels.

Recalibration of renewable strategy: The company has recalibrated its strategy to prioritise higher-margin group captive opportunities over third-party contracts. It has also shifted its focus from the low-value solar-powered irrigation pumps to optimise management bandwidth for more lucrative prospects. Among the current 3,760GW of projects under construction, 1,271MW are captive projects, representing 33% of the RE pipeline (which is expected to grow steadily). The recent order from Tata Steel for a 966MW RE-RTC project exemplifies this new strategic direction.

 Mundra heading towards long-term resolution: Considering the escalating power deficit (peak 4.0%/1.4% during YTDFY23/TYDFY24), the recurrent enforcement of Section-11 of the Electricity Act, 2003, stable Indonesian coal prices, and the competitive generation cost (INR 4.68/kWh from Tata Mundra in contrast to INR 5.8-5.77/kWh from Adani Power's Mundra), we forecast state discoms (distribution companies) to finalise long-term power purchase agreements (PPAs) before Jun’24 (when the latest extension to Section-11 will expire).

 Ambitions in transmission achievable: The transmission portfolio of the company (4,383 Ckm operational, 906 Ckm under construction, 424 Ckm declared L1 is slated to grow given the large pipeline of bids (INR 500-600 bn) in the next 6-8 months. The company has an ambition of increasing it to 10,000 Ckt km+ in the next 5 years.

 Entry into pumped-hydro storage: Tata Power has embarked on two brownfield PSP projects totalling 2.8GW – 1GW Bhivpuri PSP and 1.8GW Shirawta PSP; they are scheduled to complete by CY27/CY28 and entail capex of INR 47bn/ INR 78.5bn respectively. We believe the company will earn at least INR 9 million/MW/yearFY28 onwards (akin to lease rentals, also indicated by the management) giving it an advantage of compressed execution time and better returns.

 Capex to grow 2x (FY24-27/FY20-23): Tata Power is estimated to spend INR 600bn till FY27 across generation, transmission and distribution with major (45%) allocation towards augmenting renewable capacity, a 2x growth vis-à-vis capex during FY20-23.

 Growth momentum to gain pace: We expect a consistent growth trajectory for the company and forecast Revenue/EBITDA/Adj PAT CAGR of 15%/26%/21% by FY26. The company aspires to double the FY23 Revenue/EBITDA/PAT by FY27 which appears ambitious. We would be observing the execution progress and further refinement of strategies before building these targets in our estimates.

Recalibration of renewable strategy

* We were always concerned about the bandwidth of the management of Tata Power being stretched too thin due to the pursuit of multiple, low-value contributing opportunities such as solar-powered irrigation pumps.

* Tata Power has been at the forefront in aiding the agricultural sector by converting diesel powered pumps to solar-powered irrigation pumps. So far, it has installed more than 97,000 pumps with limited contribution to the bottom line. The shift of focus from this business area and recalibration of its strategy to optimise management bandwidth for more lucrative prospects and is a welcome move.

* Accordingly, the company has shifted its strategy to prioritise higher-margin group captive opportunities over third-party contracts. Among the current 3,760GW of underconstruction projects, there are 1,271MW of group captive projects, representing 33% of the renewable energy pipeline. This focus on captive projects is forecastd to grow steadily over time.

* Tata Power Renewable Energy Limited through its subsidiary TP Vardhaman Surya Limited entered into a contract with Tata Steel to set up 966MW RTC (Round-the-clock) solarwind hybrid renewable power capacity (379MW solar and 587MW wind power) under the Group Captive segment. The project will be commissioned by 1st Jun’25 as per the arrangement.

* Tata Power presently holds a green energy portfolio of 5,521MW, accounting for 38% of its generation mix. With 3,760MW under construction, it is aiming to surpass 15GW by FY27 and exceed 20GW by FY30.

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361