In a recent development, Nuvama Institutional Equities has expressed concerns over the future performance of Tata Power Company Ltd, anticipating a flattish-to-low growth over FY24-25E. The domestic brokerage attributes this projection to falling coal realisations and predicts a two-three year timeline for the rising contribution of renewable energy to take effect.
Nuvama remains watchful of potential growth factors, including pumped hydro, rooftop solar, Commercial and Industrial Power Purchase Agreements (C&I PPAs) with the Tata group for renewable energy, and new distribution privatisation. However, based on their analysis, Nuvama has downgraded Tata Power’s rating from ‘Hold’ to ‘Reduce’ with a revised target price of Rs 303, indicating a potential downside of 23 percent.
In the December quarter, Tata Power reported a consolidated profit after tax of Rs 1,076.12 crore, marking a 2.28 percent increase. Notably, coal profits witnessed an 81 percent YoY decline, offset by growth in solar Engineering, Procurement, and Construction (EPC), Odisha Distribution, and Tata Projects.
Despite Tata Power’s earlier reduction in FY27 profit after tax guidance by Rs 2,000 crore, Nuvama remains cautious about the company’s ability to meet targets. The brokerage identifies falling coal profits as a persistent challenge and cites a 23 percent downside, even in their bull case scenario considering assumed CGPL (Coastal Gujarat Power Ltd) profits, coal at $130, and renewable energy at a Rs 40,000 crore deal value.
Nuvama highlights Tata Power’s efforts in the renewable energy sector, with the commissioning of a captive solar module factory and plans to commence solar cell production by June 2024. Additionally, Tata Power has signed an MoU with the Maharashtra government for the brownfield development of a 2.8GW pumped hydro storage project at its existing hydro assets, expected to be completed by FY27-28.
Despite challenges, Nuvama acknowledges Tata Power’s healthy financial standing, with a net debt of Rs 38,600 crore as of 9MFY24 and a net debt to equity ratio of 1.04 times. However, they anticipate this ratio to increase to 1.5-2 times as the company expands its capacity.
