Buy TATA POWER for Target Price Of Rs. 170: Edelweiss

The Shift: Changing business orientation

Tata Power’s (TPWR) orientation towards utility allied services/EPC business model (read From a utility to growth play) is gaining heft and provides a big runway for growth over the next four years. In this note, we attempt to decode the EV profitability/return profile and TPWR’s preparedness along with RE progress and FY21 ARI. In our view, sunrise businesses, which are characterised by high growth/RoE/ESG rating and low capex intensity, could contribute ~45% to PAT by FY25.

While we steer clear of pure-play renewable companies’ very high valuations (FY25E EV/EBITDA -12x), we do argue that TPWR’s sustained re-rating would continue, bolstered by policy tailwinds. Retain ‘BUY’ and top pick with revised a TP of INR170 (earlier INR120).

Sailing through high tide; making right moves

TPWR’s transition, from a plain-vanilla traditional utility to a B2C business (EV charging, home automation, solar roof top/pumps, microgrids), gave it a head-start, especially in EV/rooftop/pumps. We had already envisaged an overall opportunity size of USD45bn in these sunrise businesses over the next four years. This along with penetration in distribution space and high coal prices (TPWR is net long coal at 2.5MT) augurs well for its profitability. Also, while the balance sheet has broadly been mended, renewable monetisation plans and strong FCF generation should provide growth capital (INR40bn equity in 3Y). Overall, TPWR’s integrated business strategy has made positive strides keeping in mind its core focus areas.

Getting future-ready; new business plans unfolding gradually

In this nascent market, TPWR already has a head-start with a commanding market share (40%-plus) across the EV charging business spectrum (5,100 chargers already). While the EV market is still evolving, as the market goes cracking, TPWR is likely to be the leader. With different types of EV business models (capex of INR15-20bn with high teens RoE), we peg total opportunity at ~USD500mn over the next four years for TPWR, which could present an INR1.5-2bn PAT opportunity annually. In RE, solar pumps and solar rooftop are gaining traction and could lead to 3x PAT growth.

Outlook and valuation: Re-rating to continue; maintain ‘BUY’

We are enthused by the 100-year-old corporate’s nimble approach towards the big energy transition–RE/EV etc. Consensus seems to have accepted TPWR’s blazing transformation (100%/25% upwards target price/EPS revision). We believe there is still more steam left for the stock to re-rate hereon as well (after 4x rally in past 15 months). TPWR presents a strong case of perception rethink—Mundra and balance sheet are non-issues. Though our revised valuation framework shies away from assigning very high multiples, it still doesn’t capture the full growth potential of the newer services/EPC business.

We are raising the TP to INR170 assigning a higher valuation to RE business (INR60/share), incorporating valuation for new businesses (INR5/share), deleveraging benefits and rolling forward to Sep-23E. We maintain ‘BUY/SO’.