Adani Power vs Tata Power: Which should you pick for long-term investment?

Adani Power and Tata Power are the two biggest power stocks in Indian markets. Adani Power, however, has been a better performer than its counterpart Tata Power in the last 1 year. In this time, Adani Power has surged nearly 5 times or as much as 385 percent while the latter has risen 81 percent.

Power sector stocks have been in focus on the back of rising demand for electricity during the summers. With rising temperature across the country since mid-March, demand for power has suddenly increased, raising the demand-supply gap. Amid rising power demand, these stocks have become more attractive.

Just in 2022 YTD, Adani Power has risen nearly 4 times, up over 280 percent, while the latter has added just 6 percent in this period. In the 8 months of 2022, Tata Power has given negative returns in 3 of them, while Adani Power in just 1. Since the market recovery in July, Adani Power has soared around 40 percent while Tata Power is up around 15 percent.

In the long term as well, the Adani Group stock has given better returns to its investors, rising from around ₹28 in 2017 to currently trade around ₹393, rallying over 1,300 percent. Meanwhile, The Tata Group stock has advanced 192 percent in this time, jumping from ₹79 in 2017 to currently trade around ₹230.

About the two

Adani Power is a subsidiary of Adani Group. It is a thermal power producer in India with a power generation capacity of approximately 12,450 megawatts (MW) comprising 12,410 MW of thermal power plants and a 40 MW solar power project. It focuses on providing power generation and coal trading. The Company also has three thermal power plants with a total capacity of approximately 3,170 MW.

Tata Power, a subsidiary of the Tata Group, is engaged in electric power generation, transmission and distribution, electronic products, and service businesses. The Generation segment comprises of generation of power from hydroelectric sources and thermal sources (coal, gas, and oil) from plants owned and operated under lease arrangements and related ancillary services. The Transmission and Distribution segment comprises of transmission and distribution network, sale of power to retail customers through a distribution network and related ancillary services. Tata Power was the first company to set up India’s first hydroelectric power stations in 1915.

Earnings

Both power stocks posted exceptional earnings in the June quarter of FY23 (Q1FY23) on the back of a rise in power demand.

Adani Power reported a 16-fold jump in consolidated net profit at ₹4,780 crore for the quarter ending June 30, 2022. It reported a consolidated net profit of ₹278 crore in the year-ago period. The company's consolidated revenue from operations rose 109 percent to ₹13,723 crore as compared to ₹6,569 crore in Q1FY22.

"We have been able to utilise the opportunities presented by the market situation effectively, leveraging our diversified fleet and operations excellence to meet rising power demand. Regulatory issues that were outstanding for a long are nearing full resolution, improving visibility and providing us liquidity to propel our drive to realise our long-term strategies and meet our stakeholder value aspirations," Anil Sardana, Managing Director of Adani Power Limited, said in a statement.

Tata Power reported a 103.2 percent increase in its consolidated net profit to ₹794.60 crore in the April-June 2022 period (Q1), beating street estimates by a wide margin. In the year-ago period, the firm reported a consolidated net profit of ₹391.03 crore.

Revenue from operations increased 43 percent to ₹14,495.48 crore, ahead of street estimates, which had pegged revenue at ₹12,035 crore for the period. TIt had posted a revenue of ₹10,132 crore in the corresponding period last year.

Praveer Sinha, MD and CEO at Tata Power, said, “We have started the new fiscal year on a solid note with all of our business clusters — generation, transmission, distribution, and renewables — performing well. As a future-ready company, we are poised to contribute towards India's green energy transition.”

Which one to pick?

Among these two stocks, Vinit Bolinjkar, Head of Research, Ventura Securities has picked Tata Power over Adani Power despite the latter's better stock performance.

Here's why:

1)Tata Power targets to expand its distribution footprint to 40 million customers by CY27.

2)Its current renewable energy portfolio of 5,524 MW comprises 2,927 MW/932 MW of operational solar/wind capacity, 785 MW of under-construction solar, and 900 MW of under-construction hybrid capacity.

3) The company targets to increase this to 20 GW by FY27E, by adding 3 GW of capacity annually over the next five years.

4)The company’s 4 GW solar cell & module manufacturing unit in Tamil Nadu is also expected to be operational by Q3FY23.

While Adani Power is focusing on increasing its capacity across new and existing plants to capture the rising demand, Tata Power is more focused on foraying in renewable energy and is aggressively increasing its renewable energy portfolio, which is a key positive for the latter since renewable energy is the future and the government is highly focussed on the same, say experts. Also, with the recent surge in Adani Power stock, the valuation has become excessively expensive and Tata Power is better valued at current levels.

Also, the revenues of both Adani Power and Tata Power show an increasing trend. However, Adani Power’s total revenue grew at a compounded annual growth rate (CAGR) of 6.3 percent in the last three years and 6.5 percent in the last five years. On the other hand, Tata Power’s total revenue grew at a CAGR of 13.1 percent in the last three years and 9.2 percent in the last five years. This shows that Tata Power has been growing at a faster pace as compared to Adani Power.

Sector Outlook

India is the third-largest consumer and producer of electricity in the world. However, the per capita consumption is less than a third of the global average which is a huge untapped potential for Adani Power and Tata Power. Experts expect the demand for power in India to grow three-fold by 2040.

Going ahead, the Electricity (Amendment) Bill, 2022 will help the sector to revive. The Electricity (Amendment) Bill 2022 allows multiple distribution licensees, with the new licensees being able to use the incumbent licensee's network.

The Bill has sought to amend section 62 to allow graded revision in tariff over a year and has proposed for an appropriate commission to fix the maximum ceiling and minimum tariff. Reforms in the power sector by Prime Minister Narendra Modi in the form of the launch of the National Solar Rooftop Portal and Revamped Distribution Sector Scheme focusing on the DISCOMs are some other important events to look out for in the sector, says Bolinjkar.