Target: ₹230

CMP: ₹243.45

In the last 10 years, Tata Power has been making large losses on its coal-powered Mundra Power plant as rising coal prices and change in Indonesian law worked against the company. Similarly, it had a successful track record of running Delhi and Mumbai distribution companies but waited more than a decade for the next opportunity in distribution, which came in only in 2022 in the form of Odisha discom.

Despite being one of the oldest power generating companies and early adopter of renewable power, it had lagged in terms of installed capacity compared to new generation renewable companies which are backed by sovereign wealth funds (SWF) or private equity (PE). Volatility in module prices sent its solar engineering (EPC) business through very low profitability periods as well.

We revise our earnings estimates and valuation to factor in lower coal prices, expectations of change in PPA, and changes in module price estimates. We also roll forward our valuation to Sep’23. We use sum-of-parts based valuation which results in our new target price of ₹230 (₹200 earlier).

We think a fall in coal price and new renewable installations will curtail FY24 reported earnings growth over FY23. Also, we think recent investments by PE players in renewable business have priced the renewable portfolio fully, leaving little near-term upside. Hold

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