Brokerage Suggests Buy This Large-Cap Tata Stock For 21% Gains, Given Over 192% Returns In 3 Years

Sharekhan Suggests bets on Tata Power Company Ltd for a target price of Rs 250 per share. The sharp fall in Tata Power's stock price makes risk-reward favourable as the stock price now largely factors in the lower renewable energy (RE) deal valuation announced in April 2022 and ignores growth potential from the solar EPC segment and benefit of potential full fuel cost pass-through for Mundra UMPP.

Stock Outlook

On Friday, the stock closed at Rs 207/share after gaining 2.47% on NSE, the stock opened at Rs 202.70/share. As stated, the stock has been hot buy the market volatility, over the 3 months the stock slid down more than 15%, whereas in the past 1 month, it slid down nearly 11%. Over the past 1 month, the stock gained more than 70%, 192% in 3 years, and around 197% in past 5 years.

Currently, the price of the stock is above Rs 88.60/share from its 52-week low levels of Rs 118.40/share. Whereas, it is 91.05/share below its 52-week high of Rs 298.05/share. According to the CMP of Rs 207/share and Rs 250/share, the estimated Target price set by the brokerage, the stock has the potential to jump 21%.

Lower RE deal valuation priced-in

Recently in April 2022, Tata Power Renewable Energy Limited (TPREL - a subsidiary of Tata Power) announced to raise Rs. 4000 crore through divestment of ~10.53% equity stake to GreenForest New Energies Bidco Limited (UK) that is a consortium of BlackRock Real Estate and Mubadala Investment Company. The deal EV is at ~Rs. 50,000 crore and assuming net debt of Rs. 16,000 crore, the pre-money equity values comes at Rs. 34000 crore ($4.5 billion), which was below street's valuation estimate. Additionally, the management had stated that money raised will be utilised for the growth capex of RE portfolio and the deal would not lower the consolidated net debt (Rs. 39,708 crore) on the books. Tata Power's stock price has declined sharply by 24% post announcement of RE deal and its CMP adequately CMP factors in lower-than-expected valuation for RE business but ignores strong growth potential from solar EPC and earnings/valuation upside from potential full fuel pass through for Mundra UMPP.

Large solar EPC business opportunity to drive solar EPC business' growth

Tata Power is India's largest solar EPC player and would benefit from the country's focus to transition from thermal power to RE. We highlight here that Indian government has plans to increase India's RE capacity to 175GW/450GW by 2022/2030 versus 110 GW in FY22. Thus, major power players including Tata Power and NTPC plan to expand its RE capacity manifold over next decade (Tata Power RE capacity target of 15 GW by FY25E and NTPC plan to take RE capacity to 15GW/60 GW by FY26E/FY32E). Moreover, Tata Power's plan to set-up a 4GW solar cell and module manufacturing unit with an investment of Rs. 3,400 crore in next 15-18 months would help make it integrated players and the same would provide stability to margin in solar EPC business and help get new orders. We thus see large growth opportunity for Tata Power's utility scale solar EPC business and we expect strong order book addition of 3-4 GW annually along with market share gain to 20% by FY25 versus 17-18% in FY22.

Supplementary PPA for Mundra UMPP could improve earnings outlook

Tata Power is in advanced discussions with Gujarat to implement supplementary PPAs for fuel cost (i.e. coal price) pass-through w.e.f January 1, 2022. Discussion for supplementary power purchase agreement (PPA) with other states is underway. The supplementary PPAs are expected to continue until coal prices normalise to pre-COVID levels. At present all four units of Mundra UMPP are operational and management has guided for much lower under recovery going forward from FY22 level of Rs. 0.63/unit. A Potential success on this front would significantly add to Tata power's PAT and improve valuation by ~Rs. 25-30/share.

Sharekhan maintain a Buy with Target Price of Rs. 250

The brokerage said, "Tata Power's focus on business restructuring (CGPL merger) and focus on high growth RE business and likely entry into power transmission would play a crucial role for sustained earnings growth and improved earnings quality (expect RoE to improve to 12.1% in FY24E versus only 7.8% in FY22). In addition, management's business restructuring plans to increase share of high-growth RE business would drive sustained improvement in ESG score. The recent sharp 30% fall in the stock price from 52-week high of Rs. 298 factors in lower-than-expected valuation for RE business and makes risk reward favourable. Hence, we maintain a Buy on Tata Power with a revised PT of Rs.250 (to reflect lower value for RE business). At CMP, the stock is trading at 2.7x/2.4x FY23E/FY24E P/BV."

According to brokerage, the Key Risks are: 1) Slower-than-expected ramp-up of RE portfolio and expansion in distribution business, 2) Lower-than expected profitability in Solar EPC business, and 3) volatility in international coal prices and tariff risk for Mundra UMPP.

About - Tata Power Company Ltd

Tata Power is a pioneer in technology adoption, with many firsts to its credit, supporting the country's energy independence. Tata Power, together with its subsidiaries & joint entities, has a generation capacity of 13,735 MW of which 35% comes from clean energy sources. The company has the distinction of being among the top private players in each sector of the value chain including solar rooftop and value-added services. Tata Power is a pioneer credited with steering the energy sector on technology, process and platform. Powering emerging technologies for the 'smart' customer, Tata Power's latest business integrated solutions, focusing on mobility and lifestyle, are poised for multi-fold growth.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.