Broker's call: Tata Power (Buy)

Target ₹72

CMP: ₹56.15

We take a closer look at Tata Power and its globally integrated utility peers on various fundamental and valuation metrics. A decisive action plan has been initiated, and execution holds the key. This transition should lead to stronger focus on specific businesses and improvement in return ratios.

We find it of interest that global utilities focused on a single line of business tend to trade at higher better multiples, as they are easier to understand and often have stronger return ratios. In addition, investors tend to look upon global integrated utilities that are undergoing transition more favourably.

We think Tata Power, an integrated utility, is attractively valued compared to global peers against the backdrop of its business transition plan that is under way. As Tata Power completes its business restructuring (sale of non-core businesses, reduction of net debt,and creating a capital refinancing vehicle for the InvIT renewable business), we think this should lead to a healthier balance sheet and stronger return ratios.

We raise our price target from ₹62 to ₹72 on the back of increased earnings forecasts, driven by Mundra (1Q earnings, lower international spot coal), lower debt and interest burdens following the equity infusion by promoter group,and stronger capex in regulated T&D business.

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