Tata Power – Shinning for a green future

TATA POWER – Shinning for a green future.

CMP – Rs 63

Market Cap – Rs 19900 Cr

Why buy Tata Power

  • The revenue of  the company is distributed into 3 segments –
  • Power distribution – 44%
  • Thermal and hydropower generation – 36%
  • Wind and Solar energy – 7.2%
  • Renewable Shift  Company has produced major of its electricity from thermal and hydro power plants, and has now shifted to renewable (solar) power generation. Tata power has guided for 15GW, (10x growth) of renewable projects by FY25, current commissioned in solar is 1.7GW and 1.5GW in pipeline. Management has guided there will be no fresh capex in the conventional thermal power capacity. The company plans to invest 40,000 cr in renewables and no new investment in conventional energy. 
  • EV Infra The company also earns its revenue from EV charging, home automation and Microgrids and plans to earn a revenue of about 3500 Cr by 2025.
  • Solar EPC order book at Rs 9,000 cr and expected to double over next 12-18 months with a PAT margin in high single digit. Tata group has captive requirement of 2GW every year which will be serviced by Tata Power. Current order book is the highest in India.
  • Power distribution – current subscribers of around 25 lakh and target to increase it to 2 crore by 2025. Revenue to double in distribution for current levels of 11100 Cr by FY25.
  • Massive Deleveraging Efforts– The management has guided to get its debt down from 48,000 to 25,000 by FY22. The company is already walking the talk, where they have reduced the debt by 4,300 cr in the last 2 quarters. Loss making group companies are now merged with Tata Power providing significant tax shield of 1,000 cr for next 4-5 years due to significant accumulation of losses. Promoters has infused 2,600 cr which is further aiding the balance sheet deleveraging efforts. 

Balance sheet deleveraging & CORPARATE ACTIONS

  1. Preferential issue of new equity shares to Tata Sons at 2,600 cr.
  2. Tata power has already sold assets worth 2,100 cr, debt has gone down by 4,300 cr to 44,000 cr, excluding perpetual debt & lease liabilities the net debt in Q2FY21 is around 37,000 cr.
  3. Assets sold and money yet to be received is 2,800 cr  
  4. Other Non-Core Assets on the block– are to the tune of of 2,000 cr. 
  5. INVIT Divestment of around 11000 Cr, execution by Q4FY21. INVIT will further release tata power with 11,000 cr of debt, management has guided the EV of this asset to be around 20,000 cr. The potential buyers are already into due diligence.
  6. Simplifying holding structure- SIMPLIFY BUSINESSES – 95 TO <40 ENTITIES BY FY 22
    Merge businesses, retain only JVs & SPVs for regulatory requirements, efficient cash management, cost synergies and focus approach.
  7. Arutmin coal mine license extended for 10 years.
  8. CRISIL and ICRA upgrades on companies long term rating.

Corporate restructuring

In order to simplify the group’s structure and ease the group’s interest cost burden, tata power has merged 3 group companies with the parent. Tata Power has merged CGPL (Mundra), Tata Solar Systems & Aftaab Investment Company. The key benefits of this arrangement will be lowering of interest costs for the subsidiaries and provide tax shield to the parent company from accumulated losses from these subsidiaries.

Tata Power is expected to have a whopping 1,000 cr of tax shield, this should help next 5-7 years of strong profitability.

 Mundra turning around

  • Mundra plant has been the biggest thorn in the company’s balance sheet suffering massive under recoveries. Management has guided that Mundra willl not incur further losses, under recoveries in Mundra has come down to 0.25 per unit from 0.90 per unit 2 years back. Company has brought down the Mundra plant debt for 8,000 cr to around 4,000 cr. The collapse in global coal prices has aided Mundra’s reduction in under recoveries.
  • Even without an elusive Mudra resolution with state goverments, low coal prices and deleveraging should make this pain inconsequential.

Domestic Coal Prices

RENEWABLE SEGMENT & INVIT

The company has a Rs 40 bn of order book and there are 45 GW of pipeline of projects currently being pursued by the company, if the company wins even some of these, the Street will start assigning a much higher valuation to the business. Tata Power’s FY25 target is 15 GW. Tata power will not invest any further in Thermal capacity but plans to invest 40,000 cr in renewables in next 5 years.

  • ESG related focus likely to drive huge investments and valuation in renewables large financial institutions and oil majors have publically announced carbon-neutral targets which will involve their participation in the renewable energy space. India is the second largest renewable market with current capacity of c80GW and with a target to reach 430GW by 2030. The intent to make an early entry into the Indian market can drive valuations for its renewable business InVit.
  • The new businesses undertaken by the company such as microgrids, EV charging, solar pumps, solar roofing hold tremendous potential in the future.
  • Industry overview India is the second largest renewable market with current capacity of 80 GW and with a target to reach 430 GW by 2030, with very limited competition and early entry into the market the valuation of the company might drive higher when these projects reach the market. India has highly favorable dynamics in terms of solar, as a country we get 300 days of sunlight which is highly favorable for solar growth in the country. Solar power plants are cheaper to set up, have lower operating cost and negligible maintenance compared to thermal power plants, reducing the production cost of electricity and higher profits.

Solar EPC- Management has given ambitious targets for its EPC business. Good amount of demand will come from its in house group companies, which will also help in protecting margins, receivables and cash flows.

Solar Pumps- Another space where management sounded very bullish about the future prospects.

Much Awaited INVIT– Tata Power has selected seven bidders out of 15 for its renewable business InVit, namely Petronas, Brookfield, Mubadala, CDPQ, KKR, APG and Omers. Currently, there is INR11,000 cr of attributable debt in the renewable business and 8,000 cr as equity valuation.

With the renewable assets hived off into InVit, Tata Power will be able to deconsolidate its debt, sell part of its equity investment in cash and account for its balance investment as an asset for further expansion in solar. This can result in INR18,500 cr of net debt reduction from the consolidated balance sheet.

Other key Segements offer optionality to further growth

Management has given good guidance on other new businesses like microgrids, EV Charging and solar pumps, these businesses are currently very small we would like to see how it shapes up in the future.

Additionally, government is very keen on privatizing state own discoms starting some genuine efforts towards Union Territories, we have seen many failed attempts in this area, hence we are not assigning any value to it. Tata power has a target of expanding its foot print to 20 million household by FY25 vs current 2.6 million.

Financials

Tata power has ambitious profitability & deleveraging FY23-25 targets.  Future prospects of renewable can surprise on the upside. Management has guided for a growth of 3x in profitability by FY25, we believe strong promoter brand, world over shift away from coal based power, effective capital allocation and INVIT divestment can lead us to the FY25 PAT targets much earlier.

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