Updated: Apr 14, 2022
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“We must harness this water. We must turn it into power.” Jamsetji Tata had this idea whilst on a picnic at Rohu River.
Jamsetji Tata wished to give Mumbai clean, pollution-free energy. In the next few years, three hydroelectric entities, Tata Hydro-Electric Power Supply Company in 1910, the Andhra Valley Power Supply Company in 1916 and the Tata Power Company in 1919, were incorporated to give shape to the dream.
Tata Power is India’s largest integrated power company with 13 Giga Watt of installed power generation capacity, 12 million customers and a footprint across 18 states in India. 68% of its total power generation capacity is derived from conventional sources, with the other 32% coming from renewable energy sources.
Tata Power is pivoting its operations from conventional sources of power generation to a focus on the renewable energy sector. It aims to scale up its renewable energy portfolio to reach at least 60% of its total generating assets by Fiscal Year 2025.
In Asia, India is the second largest power market after China with an installed power generation capacity of approximately 400 Giga Watt, with approximately 40% of that coming from renewable, non-fossil fuel sources. At the 26th UN Climate Change Conference, the country's 2030 renewable power target was raised to 500 Giga Watt, from 450 Giga Watt, with an aim to cut the country's carbon emissions, the third largest in the world.
Tata Power is now ranked number 1 in Solar Rooftop EPC for 7 years in a row and has increased its market share to 10% of the market. The company’s focus on renewable power has also resulted in it becoming India’s largest integrated Solar Power EPC company. The company is also a Tier-1 solar modules and cells manufacturer.
However, Tata Power continues to be exposed to the price fluctuations related to the inputs of their conventional sources of energy, such as thermal coal. These price variations and availability can impact their margins significantly.
So what is our view on company valuation?
Tata Power is trading at Price to Earnings (TTM) multiple of approximately 45 times. The share price of Tata Power has increased by around 100% in the last 6 months. While Tata Power has demonstrated strong revenue growth under its renewable energy business, Tata Power’s total historical revenue growth has been slow and its EBITDA margin has remained at an estimated 18% with ROCE of around 7%.
For a company that is still currently generating most of the power from conventional sources, it is our opinion that these levels of pricing are on the higher side.
As for the risks to this analysis, External funding for renewable energy, at a high valuation can drive the stock higher.
So, would you invest in Tata Power? Share your views in the comments section and like the video if you liked our analysis.
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