Tata Power stock likely to remain subdued in near-term; here's why

The company is focussed on tapping the market for high-margin captive renewables opportunities, exploring brownfield pumped hydro storage, and expanding the transmission business beyond distribution

Tata Power saw a big sell-off, with the stock falling almost 8 per cent after declaring disappointing results for the October-December quarter (Q3) of 2023-24 (FY24) on Friday evening.

The company reported net consolidated revenue of Rs 14,650 crore, up 4.4 per cent year-on-year (Y-o-Y), and earnings before interest, tax, depreciation, and amortisation (Ebitda) of Rs 2,607 crore, up 2 per cent Y-o-Y, in the quarter, led by higher sales across Odisha distribution companies (discoms) and capacity addition in renewables. This was well below consensus estimates.

The reported profit after tax (PAT) was at Rs 1,076 crore, up 2 per cent Y-o-Y, due to lower tax, but this was lower than expected due to a lower dividend from the coal special purpose vehicles.

The company is focused on tapping the market for high-margin captive renewable opportunities, exploring brownfield pumped hydro storage, and expanding the transmission business beyond distribution.

It is also looking at the resolution of the Mundra plant issue. The Coastal Gujarat Power Mundra plant operates under Section 11 (currently applicable up to June) with a plant load factor of 60 per cent.

Overall, domestic power demand continues to surge with a 10 per cent quarter-on-quarter growth in Q3FY24.

Tata Power management estimates this trend will last for two to three years. Globally, it says the downtrend in coal prices has bottomed, and coal prices are likely to remain stable.

The renewable subsidiary, Tata Power Renewable Energy (TPREL), reported an Ebitda of Rs 610 crore, down 6 per cent, and a net profit of Rs 54 crore for Q3FY24 versus PAT of Rs 92 crore Y-o-Y, a 41 per cent drop.

The installed capacity of its renewable portfolio has increased to 4.2 gigawatt (Gw), with another 4.7 Gw under various stages of implementation.

TPREL has secured a firm and dispatchable renewable energy project from SJVN, for 1,316.5 megawatt (Mw). It has also installed over 400 public electric vehicle charging points in Q3FY24.

TP Solar reported revenue of Rs 4,030 crore (up 182 per cent Y-o-Y), with an Ebitda of Rs 200 crore (up 111 per cent Y-o-Y). It has an order pipeline of 3.6 Gw worth Rs 15,900 crore. The solar rooftop business posted revenue of Rs 950 crore in Q3FY24 (versus Rs 770 crore Y-o-Y) and an order book of Rs 2,340 crore.

The management believes the new Pradhan Mantri Suryoday Yojana (targeting solar rooftops for 10 million households) has the potential for 30-40 Gw of new solar additions. The company is the industry leader with a 20-25 per cent market share in rooftop solar. In pumped hydro, the company is developing the 1,000 Mw Bhivpuri Pumped Storage Project (PSP) and the 1,800 MW Shirawata PSP with respective investments of Rs 4,700 crore and Rs 7,850 crore.

In Odisha discoms, aggregate technical & commercial (AT&C) losses are steadily narrowing. Currently, TP Central Odisha Distribution, TP Southern Odisha Distribution, TP Western Odisha Distribution, and TP Northern Odisha Distribution (erstwhile North Eastern Electricity Supply Company of Odisha) have AT&C losses of between 19 per cent and 26 per cent, and this is expected to narrow to between 9.5 per cent and 15 per cent over a decade.

Collectively, the four Odisha discoms booked revenue of Rs 4,400 crore, up 7 per cent Y-o-Y, with Ebitda of Rs 360 crore, up 72 per cent Y-o-Y, and a net profit of Rs 63 crore, up 75 per cent Y-o-Y.

Net debt increased to Rs 38,600 crore from Rs 36,609 crore in the second quarter of FY24 due to Rs 3,570 crore of capital expenditure. That’s a very acceptable 1.04x of net debt to equity and around 2.9x of net debt to Ebitda.

While the Street was disappointed, analysts are divided.

According to Bloomberg, six of the 14 analysts polled after the results have a ‘buy’ and an equal number have a ‘sell’ rating; two are ‘neutral’. Their average target price is Rs 335.5, indicating some downside from current levels.