Buy Tata Power Ltd For Target Rs.490 by Motilal Oswal Financial Services Ltd
Renewables to drive profitability in FY26-27
* TPWR’s 3QFY25 EBITDA came in 4% below our estimate but was up 38% on a YoY basis. The rise in EBITDA was driven by: 1) robust growth in the standalone business amid strong PLFs and regulatory upside in Mundra and 2) rising contribution from the renewables business amid progressive commissioning of renewable generation capacity and earnings contribution from the cell and module business. Profitability at the PAT level was driven by other income, which came in higher than our estimates.
* Key highlights for the quarter include: 1) TPWR commissioned 865MW of RE generation capacity in 9MFY25, which is trailing the guided target of ~2- 2.5 GW of RE generation commissioning per annum; 2) cell operations continue to ramp up, with 2 GW commissioned in Nov’24, followed by another 2GW commissioned in Jan’25; 3) The company is actively exploring new bidding opportunities for DISCOM privatization across India, including in UP; 4) TPWR is evaluating opportunities in the nuclear space.
* While 3QFY25 adjusted PAT was above our expectations, overall, we trim our FY26-27 EPS by 7%/7%, mainly due to a slower-than-expected pace of commissioning in the RE generation business. ? We reiterate our BUY rating on the stock with a TP of INR490.
EBITDA in-line; adj. PAT boosted by higher other income
Results overview:
* TPWR reported a consolidated EBITDA of INR33.5b in 3QFY25, 4% below our estimate of INR35b (+38% YoY).
* Revenue stood at INR154b (+5% YoY) for 3QFY25, while the reported PAT was 5% above our est. at INR11.8b (+10% YoY), mainly on account of higher other income and lower-than-estimated tax rate.
* Adjusted PAT stood at INR10b (+8% YoY), which was 18% above our est. of INR8.7b. Operational highlights for 3QFY25:
* Solar Utility Scale EPC & Group Captive order book stood at INR135b in 3QFY25-end.
* In 3QFY25, TPWR installed 134MW of rooftop solar, and its third-party solar order book stood at INR8.2b.
* The 4.3 GW module plant is operating at over 90% utilization, while an additional 2GW Mono PERC Cell line was commissioned in Dec’24 and a 0.3GW TOPCon Cell line is expected to be commissioned in Q4FY25.
* As of Q3FY25, the company had a clean and green operational capacity of 6.7 GW (43% of total installed capacity), with an additional 10.1GW under construction.
* The transmission portfolio stands at 7,047Ckm, including 4,633Ckm commissioned and 2,414Ckm under construction.
* The company entered into a partnership with Bhutan’s Druk Green Power Corporation Ltd. to develop 5,100 MW of clean energy projects in Bhutan.
Highlights of 3QFY25 performance
* Capex: INR120b was spent in 9MFY25, with an additional INR100b planned for Q4FY25, bringing the total to ~INR220b for FY25.
* TPWR commissioned 865MW in renewable generation during 9MFY25, with a target of 600 MW for commissioning in Q4FY25. It plans to add 2-2.5 GW annually in FY26 and FY27, comprising solar and wind capacity.
* 2 GW Solar Cell line, commissioned in Nov’24, is operating at 90% capacity. An additional 2 GW Cell line, commissioned in Jan’25, is undergoing stabilization and is expected to be fully operational by Feb’25.
* The company is actively exploring new bidding opportunities for DISCOM privatization across India, including UP DISCOMs, under a potential publicprivate partnership model.
* Nuclear energy: The business model and approval process are under evaluation. Regulatory approvals typically take ~24 months, with construction spanning 4-5 years.
Valuation and view
* The valuation of TPWR is segmented across various business units, leading to a target price of INR490/share.
* The regulated business is valued using a 2.5x multiple on regulated equity.
* The coal segment is valued based on equity with a 1.5x multiple of FY24 book value.
* The renewables segment is valued at a 14x multiple of the projected FY27 EBITDA.
* The pumped storage segment is valued at 1x PB, while other segments are valued at 1.5x PB. Cash and investments add INR56/share.
* The sum of these contributions results in a total TP of INR490/share, reflecting the comprehensive valuation of TPWR’s diverse business segments.
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