Company Name – Tata Power Company Limited (Tata Power) Current Share Price – INR 228 (November 22,2021) Market Cap – INR 72,742 cr |
1. What is interesting about the stock?
“We must harness this water. We must turn it into power.” The idea struck Jamsetji Tata on a picnic by the Rohu river. Everyone knew that power was an electrifying concept. But power needed a waterfall. And while there was water aplenty here, this was a river. How could this water be harnessed?
More than a century ago, the visionary Jamsetji Nusserwanji Tata, resolved to provide pollution-free, clean power to Mumbai, a city that was choking on the fumes of the boilers of textile mills. 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. Together these three companies were referred to as the Tata Electric Companies. The other two entities were amalgamated into the Tata Power in the year 2000.
Tata Power’s journey over the last 10 decades has been a fascinating saga of pioneering initiatives and responsible business with minimal impact on the environment, and the socioeconomic empowerment of the communities that it touches. Inspirational history – where is Tata Power today?
Tata PowerTata Power is India’s largest integrated power company with 13 GW of installed power generation capacity, 12 million customers and a footprint across 18 states in India. Tata Power is a 107 year old company with 68% of its total power generating capacity derived from conventional sources (thermal coal and other conventional fuels) and the balance 32% from renewable sources. Tata Power’s revenues have recorded a growth of 3.3% compounded annually over a five year period increasing from INR 27,588 cr in FY2017 to INR 32,468 cr in FY2021. During this period Tata Power’s renewable energy generating assets have increased at a CAGR of 13.4%, increasing its share from 20% of generation capacity at the end of FY 2017 to 32% of its power generating capacity at the end of FY2021. Tata Power is in the midst of pivoting its operations from an asset focused power generation company to a company which is more focused on the renewable energy sector. Tata Power also aims to scale up its renewable energy to account for at least 60% of its total generating assets by FY 2025, when it aims to reach 25GW of total generating capacity with 15GW of renewable assets.
In Asia, India is the second largest power market after China with an installed power generation capacity of c. 400 GW as of end-October, with non-fossil fuels/ renewable sources making up c. 160 GW, or 40%, of the total power generation capacity, according to data from the Ministry of Power and New & Renewable Energy (MNRE). There has been a reduction in the power tariff of power generated from renewable sources with solar power tariff in India falling to its lowest level on record of INR 1.99/ kilo Watt hour (kWh) in 2020-21, down approximately 70% from INR 6.5/kWh in 2013-14, according to the data from the MNRE. Wind power tariff was at INR 3/kWh in 2020-21, down approximately 50% from INR 5.9/ kWh in 2014-15. Conventional power prices, meanwhile, ranged between INR 3-4/unit on an average in 2019-20, slightly higher than five years ago, but within the same range, the October 2021 bulletin of the Reserve Bank of India showed. At the 26th UN Climate Change Conference,(COP26), the country's 2030 renewable power target was raised to 500 GW, from 450 GW, aiming to cut the country's carbon emissions, the third largest in the world.
Tata Power is now ranked no 1 in Solar Rooftop EPC for 7 years in a row and has increased its market share to 10% of the market for the 12 month period ended June 2021. Tata Power’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. Aided by supportive government policies and the arbitrage between the costs of conventional and renewable sources of power, renewable energy is a growth sector which features prominently in Tata Power’s blueprint for the way ahead and Tata Power is well poised to capitalize on the opportunities that may present itself.
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 with end price linked to the Power Purchase Agreements signed with the state governments. These price variations impact their margins significantly and has also impacted their ability of revenue generation. State distribution companies are the main buyer of the generated power, and they are perennially in losses due to subsidization of power to agriculture and power losses/theft. So, it is a very difficult business to operate with margins squeezed on both sides – input and output.
2. Key Historical Financials
Company has grown its revenues by 11% y-o-y from INR 29,136 cr in FY2020 to INR 32,468 cr in FY2021, its EBITDA margin and its PAT margin have remained at similar levels
However the company has shown an improved financial performance in Q2 FY2022, with its revenue increasing by 18% on account of the acquisition of the Odisha Discoms and the increased revenue from higher execution of projects in the renewable energy space as compared to Q2 FY2021.
On account of lower utilisation in Mundra power plant, there has been a decline in EBITDA from INR 1,627 cr in Q1FY2022 to INR 1,329 cr Q2FY2022. The company had one time non exceptional profit from the sale of its wholly owned subsidiary Trust Energy Resources Pte. Ltd. (TERPL), which has improved its PAT position from INR 280 cr in Q1FY2022 to INR 422 cr in Q2 FY2022.
3. What is my view on company valuation?
Tata Power is trading at PE (TTM) multiple of c. 50x. The share price of Tata Power has increased by c.120% in the last 6 months. While Tata Power has entered and 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 c.18% for FY 2020 and FY 2021. In Q2 FY2022 its EBITDA margin has declined to 13.5% from 23.7% in Q1FY2021, impacted by the lower power generation from CGPL on account of higher coal prices. For a company that is still seeing impact to its profitability due to inputs costs and is pivoting to a company with larger share of generation capacity from renewable sources, it is our opinion that these levels of pricing are on the higher side.
A company like NTPC which has a total installed power generation capacity of c. 65 GW, (which is almost 15% of the total power generation capacity of India), has a revenue of INR 111,531 cr in FY2021 with a PAT of INR 14,635 cr and is trading with a PE (TTM) of c. 8x.
4. What are the risks to the investment analysis?
Key risks are:
Reducing price arbitrage between the costs of conventional and renewable sources of energy can adversely impact addition of fresh capacity of renewable sources of energy, which will impact the adoption of renewable sources of energy.
On account of rising electricity bill for the state of Gujarat, GUVNL has decided to buy power at a higher price of INR 4.5-5.5 /unit from CGPL. This though, a temporary phenomenon, will help in improving the profitability of the operations of CGPL’s power plant.
External funding, at renewable energy level, at a high valuation can drive the stock higher
About the Author
I am a Chartered Accountant and I have more than 18 years of experience in Corporate and Investment banking working in Financial Institutions in South and South East Asia.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.