Stock analysis: Analysts put a resounding 'sell' call on Tata Power

Tata Power, a Tata group company, is India's largest integrated private power company, with a significant international presence.

The company is involved in the generation, distribution, and transmission of power.

The firm started as the Tata Hydroelectric Power Supply Company in 1910, which amalgamated with the Andhra Valley Power Supply Company in 1916.

Tata Power has developed the country's first 4000 MW Ultra Mega Power Project at Mundra (Gujarat) based on super-critical technology.

It has successful public-private partnerships in generation, transmission, and distribution in India. It is one of the largest renewable energy players with a 2.6GW operational capacity in 11 states.

The company has operations in India, Singapore, Indonesia, South Africa, and Bhutan. Tata Power Group has its operations based in 35 locations in India.

Tata Power's international presence includes strategic investments in Indonesia through a 30% stake in the leading coal company, PT Kaltim Prima Coal (KPC), and in Singapore through Trust Energy Resources to securitise coal supply and the shipping of coal for its thermal power generation operations.

In South Africa, through a joint venture called `Cennergi' to develop projects in South Africa, Botswana, and Namibia; in Australia, through investments in clean coal technologies; and in Bhutan, through a hydro project in partnership with the Royal Government of Bhutan.

As of March 31, 2021, the company had 59 subsidiaries (44 of which were wholly-owned), 33 joint ventures, and 5 Associates.

Product Portfolio

The company has an installed generation capacity of 13061 MW (as of September 2021) out of which 3,948 MW is from "Clean and Green sources" (hydro, waste heat recovery, wind and solar) in India.

The company has a presence across the entire power value chain: generation (renewable, hydro and thermal power), transmission and distribution, coal and freight, logistics, trading, and consumer-facing solar rooftop and electric vehicle charging businesses.

Tata Power has signed a Distribution Franchisee Agreement (DFA) with Ajmer Vidyut Vitran Nigam Limited (AVVNL) and formed a Special Purpose Vehicle (SPV) named "TP Ajmer Distribution Limited" (TPADL) to cater to the power requirements of customers in Ajmer for a period of 20 years.

Deals

On April 15, 2022, "BlackRock Real Assets-led consortium, and Mubadala Investment Company, have entered into a binding agreement to invest in Tata Power’s renewable energy subsidiary, (Tata Power Renewable Energy)," the company said in an exchange filing.

As per the filing, BlackRock Real Assets, together with Mubadala, will invest ₹4,000 crore by way of equity or compulsorily convertible instruments for a 10.53% stake in Tata Power Renewables, translating to a base equity valuation of ₹34,000 crore. The final shareholding will range from 9.76% to 11.43% on final conversion, it said.

Subject to the necessary approvals, the transaction is expected to close within the next 2-3 months. The first round of capital infusion is projected to be completed by June 2022, with the balance of funds infused by the end of the fiscal year 2022.

Financials

Tata Power reported a net profit of ₹425.8 crore in the December quarter, up 71.6 percent year on year.

It reported a 43.6 percent year-on-year increase in consolidated revenue from operations for the December quarter, to ₹10,913.1 crore, up from ₹7,597 crore the previous year.

The company's cost of power purchase has jumped sharply in the December quarter to ₹3,631.7 crore from ₹1,802.3 crore.

The company's transmission business reported an 83.5 percent year-on-year rise in revenues to ₹7,125.7 crore.

The company's cumulative solar rooftop portfolio has crossed 900 MW and the FY22 order book crossed ₹1,000 crore with ₹375+ crore orders won in the third quarter.

Stock Performance

Tata Power's stock has risen 165 percent in the last year, compared to a 22 percent rise in the S&P BSE Sensex, and it has risen 265 percent in the last three years.

Further, over the past five years, the market price of the stock has zoomed by 208 per cent, as compared to a 105 per cent surge in the Sensex.

Despite the large deal, Tata Power's share price fell more than 5% on Monday trade, as analysts believe the fall in the stock price reflects investors' already figuring in the probability of such a merger in the renewable energy market.

According to IIFL Securities, the stock's closing price on April 13 was reasonably priced in the deal's valuation.

Future Plans

Tata Power said that it will set up a 4 GW solar cell and module manufacturing capacity at an investment of ₹3,400 crore as the company further pushes towards renewable energy sources.

"Over the next five years, Tata Power Renewables aims to achieve a portfolio of over 20 GW of renewable assets and a market-leading position in the rooftop and electric vehicle charging space across India," the company said.

Tata Power Solar, a subsidiary of Tata Power, has secured orders to install 100-megawatt (MW) of distributed generation (DG) capacity in Maharashtra on behalf of state-run energy efficiency services (EESL).

Outlook

HDFC Securities downgraded the stock from 'reduce' to 'sell' and decreases the target price to 231 vs 277 since the valuation of ₹34000-38000 crore is less than their expectation of ₹45000 crore.

An average of 19 analysts polled by MintGenie have a 'sell' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.