Tata Power (TPCL) is on the cusp of a mega transformation. It is: (i) shedding the burden of legacy by way of deleveraging and restructuring and (ii) realigning the company model to new ESG trends, which are each niche and scalable, to harness development. While Street’s fixated on legacy troubles and valuing TPCL accordingly, we argue the enterprise has outlived its previous and is primed for sustainable and clean development.
We plumb TPCL’s new possibilities ($87 bn)—renewable power (RE), Distribution and EV—and its positioning thereof. And make a case that TPCL is powering ahead on a sustainable development path (25% CAGR), which would drive a shift in how it is perceived and at some point spur its re-rating. Retain Buy with a TP of Rs 95 (up from Rs 75).
Cranking up development engine: We classify TPCL’s development into: (i) standard/old-line and (ii) sunrise. Our proprietary work pegs the sunrise market place possible at $59 bn (2x standard) more than the subsequent three–four years, but TPCL’s market place share thereof would possibly lag its share in the standard market place. Overall, more than 70% of the incremental
PAT (excluding interest expense reduction) would be sunrise-driven.
Importantly, development would be ESG-accretive, contrary to Street’s perception. We count on CESU/EPC to make excellent the most likely loss of Rs 25 bn in renewable InvIT income, and thermal income mix to minimize by 10% to 38% in FY23.
Deleveraging and restructuring: The final decade for TPCL was marred by debt/valuation trap owing to different elements.
The enterprise is now on track to shed its dubious tag of a ‘high leverage and complex company’. Its corporate DNA has mutated with disentangling of operations and deleveraging (to be slashed by 50% by Mar-21). After paying down Rs 40 bn in external debt, Mundra is broadly self-sustainable, and, need to coal costs not spiral (low odds in our view), the CT problem stands relegated.
Outlook: Sunrise powering growth— In this note, we argue that Tata Power is the most extensive player in the complete renewable/EV chain. We forecast the sunrise company PAT mix at 40–45% by FY23. We are raising the TP to Rs 95 assigning a larger valuation to renewable EPC (Rs12/share) and developer renewable (Rs 18/share), and incorporating the Odisha distribution company (Rs 6/share) owing to stronger execution and peers’ valuations. Accordingly, we are raising EPS by 20–30% for FY21–23e. Our earnings forecast/target cost is 15/30% larger than consensus, and we count on consensus to stick to suit, related to the previous. We keep ‘BUY/SO’.