Tata Power’s recalibrated strategy involves tapping high-margin group captive RE

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/PAT CAGR of 15%/23%/32% 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/PAT CAGR of 15%/23%/32% 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.
Financial Summary
(INR mn)
Y/E March
FY22A
FY23A
FY24E
FY25E
FY26E
Net Sales
4,28,157
5,60,331
6,24,348
7,12,946
8,45,236
Sales Growth (%)
29.4
30.9
11.4
14.2
18.6
EBITDA
75,111
86,304
1,17,105
1,30,091
1,70,996
EBITDA Margin (%)
17.5
15.4
18.8
18.2
20.2
Adjusted Net Profit
17,414
33,364
66,865
75,610
93,722
Diluted EPS (INR)
5.4
10.4
20.9
23.7
29.3
Diluted EPS Growth (%)
24.0
91.6
100.4
13.1
24.0
ROIC (%)
7.9
6.7
12.0
10.6
11.2
ROE (%)
6.8
11.1
17.9
17.1
17.9
P/E (x)
51.7
27.0
13.5
11.9
9.6
P/B (x)
4.0
3.1
2.6
2.2
1.8
EV/EBITDA (x)
17.9
15.4
11.6
11.2
9.5
Dividend Yield (%)
0.6
0.7
0.7
0.7
0.7
Source: Company data, JM Financial. Note: Valuations as of 05/Dec/2023