Tata Power: Growth driven by new businesses to support the stock

Tata Power is deploying a lot of capital upfront, mostly in new-age emerging businesses such as solar, EV charging, and others.

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Highlights

• Renewable business growing at a higher pace with better margins


• Solar EPC business reports good execution and strong orders in hand


• Profitability improving on the back of growth in renewable business


• Stock trading at 18 times fiscal 2024 estimated earnings

Tata Power (CMP: Rs260 Market capitalisation: Rs 83,110 Crore, Stock Rating: xxxx)is deploying a lot of capital upfront, mostly in new-age emerging businesses such as solar, EV charging, and others. Many of them are at a nascent stage but hold a lot of promise. In the current year, Tata Power intends to undertake capex of close to Rs 11000 crore. It spent Rs 4500 crore in the first half of the current fiscal. It has ambitious plans in renewable and clean energy which would start reflecting in its performance over the next two years.

Business Performance

The company recently announced its results for the quarter ended September 2023, with the clean energy portfolio now amounting to 5500 MW or about 38 percent of its total capacity. During the quarter, its core standalone business reported a 4 percent year-on-year (YoY) growth in revenue.

However, excluding the standalone results, revenue from the remaining businesses, such as solar, renewables, and others, grew 18 percent on a YoY basis. Tata Power Solar Systems saw a 68 percent surge in revenues.

This also helped in higher profitability with EBITDA (earnings before interest, tax, depreciation, and amortisation) margins expanding by 427 basis points to 17.8 percent. The companys renewables business recorded an EBITDA of Rs 910 crore, a 33 percent YoY growth. While the traditional business is stable, new businesses have started to provide scale and margins which is a good sign for growth in the coming years.

Earnings Outlook

The company is aggressively expanding its clean energy portfolio. Close to 3760 MW is under implementation, which is expected to be operational over the next two years. Once these projects are operational, its renewable capacity will reach around 50 percent of the total operational capacity. By the end of 2030, it aims to reach 70 percent of its total capacity.

This does not include the 2800 MW pumped hydro power project which it expects to commission over the next 36 months.

One of its large projects — the single largest facility to manufacture 4300 MW solar cells and modules — has started trial production. This will start to contribute in the coming months and provide growth and earnings visibility. This facility would also ease supply-side issues and lighten cost pressure on its captive solar EPC projects. Its EV charger business is growing fast with 62000 home chargers and 4900 public chargers being installed.

Valuations

Post the results, the company has seen earnings upgrades mainly on account of higher margins and the contribution from renewables businesses. The

stock has experienced a modest correction from its peak of Rs 290 in April of this year to Rs 257 per share now.

It still offers good value in the light of sustained commitment to deploy growth capital in the emerging segments, emphasis on green energy, and initiatives to enhance conventional business operations.

Further, the potential turnaround of its traditional business is a key factor in the re-rating of the stock. Its present valuation stands at 18 times its anticipated earnings for the fiscal year 2025. This is reasonable.

Do write in your feedback and suggestions to: jitendra.gupta@nw18.com Follow author on X @jitendra1929.

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