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* Tata Power Co Ltd (TPWR)’s 2QFY25 EBITDA came in 15% above our estimate of INR32.6b despite challenges at Mundra (low plant availability) and Odisha discom operations (impacted by cyclone/heavy rains). However, the adjusted PAT was just a 2% miss vs our estimate.

* Key highlights for the quarter included: 1) module manufacturing is now operating at near 100% utilization while cell operations have commenced, 2) the company is looking to execute a bulk of the EPC order book in 2HFY25, 3) while RE generation commissioning has been slow till now, management expects this to pick-up pace as cell/module manufacturing ramps up operations, and 4) the board approved the investment proposal for 1GW pumped storage project.

* Following the weak 2QFY25 result at the reported PAT level, we cut our FY25 estimate by 13%, mainly as we build in the INR4.4b merger-related charges and given the weaker profitability at some of the Orissa subsidiaries. We also moderate our FY26 adjusted PAT by 5% as RE generation ramp-up has been somewhat behind expectations.

* We reiterate our BUY rating on the stock with a TP of INR509.

Steady 2Q; reported PAT impacted by merger-related charges

* Results overview:

* TPWR reported a consolidated EBITDA of INR37.4b in 2QFY25, 15% above our estimate of INR417b (+21% YoY) driven by ramped-up solar manufacturing and operational efficiency across businesses.

* Revenue stood at INR156.9b (-0.3% YoY) for 2QFY25, which was 18% below our est. of INR190b.

* Adjusted PAT was just 2% below our est. at INR10.7b (+20% YoY).

* In 1HFY25, net sales/EBITDA/APAT grew 7%/21%/11% YoY to INR329.9b/INR73.3b/18.9b, respectively. In 2HFY25, we expect net sales/EBITDA/PAT to increase 44%/52%/34% YoY.

Operational highlights for 1HFY25

* In 1HFY25, the company installed 222MW of rooftop solar across the country in all segments.

* The solar EPC order book stood at INR159 in 2QFY25 end.

* As of Q2FY25, the company has a clean and green operational capacity of 6.4 GW with an additional 6.5GW under construction.

* The transmission portfolio stands at 7,049 Ckm, including 4,633 Ckm commissioned and 2,416 Ckm under construction.

* S&P Global Ratings upgraded its rating from ‘BBB-’ to ‘BB+’.

Highlights of the 2QFY25 performance:

* A large proportion of the current EPC Order Book (OB) projects is expected to be implemented in Q3-Q4FY25 and the management has reiterated its target of INR110b revenue in FY27 for the EPC business.

* The 4.3 GW module plant is operating at near 100% utilization, while cell operations commenced with the commissioning of a 2 GW cell production line during 2Q. By the end of Nov’24, full stabilization for the cell line should be achieved.

* The board has approved an investment in the 1,000 MW PSP project, the work for which will start from 1st Jan’25 and all necessary approvals for the project have been received barring one.

* ICRA, CARE, and S&P Global have all upgraded ratings recently, which should lead to lower interest costs.

* 5GW of under-construction RE projects will be executed by FY26 and the yearly run rate should be 2.5GW for RE generation commissioning.

* The Mundra plant could not be operated in Sep’24 due to a fault with the conveyor system. However, the plant is now operating at full capacity.

Valuation and view

* The valuation of TPWR is segmented across various business units, leading to a TP of INR509/share.

* The regulated business is valued using a 3x 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 the other segments are valued at 1.5x PB. Cash and investments add INR57/share.

* The sum of these contributions results in a total TP of INR509/share, reflecting the comprehensive valuation of TPWR’s diverse business segments.

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