Morgan Stanley double upgrades Tata Power, Torrent Power; check out details

Morgan Stanley has revised its stance on 6 utility stocks from Tata Power, Torrent Power to Suzlon Energy

Global brokerage Morgan Stanley has double upgraded Tata Power and Torrent Power in its recent report on the 'Utility' sector.

For Tata Power, it has revised its rating to 'Overweight' from 'Underweight' while raising its target to Rs 577 from Rs 331 per share. As per the brokerage, the company has a good mix of a cash cow-regulated business earning assured returns and a market-linked business.

Additionally, Tata Power offers earnings growth with reasonable Return on capital employed (ROCE) and controlled leverage, Morgan Stanley said.

For Torrent Power, Morgan Stanley has double upgraded its stance from 'Underweight' to 'Overweight' with an increase in target to Rs 2,268 from Rs 1,185 per share. As per Morgan Stanley, Torrent Power is uniquely positioned in the current cycle with large merchant capacity, steady growth in the core business, a pickup in renewable growth, and a lean balance sheet.

 

Likewise, it has also upgraded Bharat Heavy Electricals (BHEL) to 'Overweight' from 'Equal-weight' with a raise in target to Rs 352 from Rs 220 per share. Explaining the rationale behind the upward revision, the brokerage said coal ordering visibility is strong and competition is benign.

Further, the legacy contracts are likely to be over by H1FY27, thus improving earnings and cash flow visibility.

Meanwhile, it has maintained an 'Overweight' rating on NTPC and raised its target to Rs 496 from Rs 423 per share. As per Morgan Stanley NTPC will increase its market share in conventional capacity in this cycle and has moats to build a strong renewable energy platform. Further, visibility on nuclear capacity additions would add to its earnings momentum in the longer term.

On the flipside, the global brokerage has downgraded Power Grid, and Suzlon Energy to 'Equalweight' from 'Overweight' with a revision in target to Rs 362 from Rs 296 and Rs 88 from Rs 73 per share.

Morgan Stanley sees risk reward for Suzlon as more balanced and would await stronger execution.

In the case of Power Grid, Morgan Stanley believes the company had the slowest earnings growth of 7 per cent compound annual growth rate (CAGR) F24-27e, as compared to most peers.

Moreover, it sees a potential rise in competitive intensity with existing players raising capital and new entrants entering the segment and thus lower visibility on the market.

Morgan Stanley's outlook on Utility sector:  

According to Morgan Stanley, India's power demand has stayed resilient at over 7.5-per cent growth so far in the current financial year (FY25-YTD). This has resulted in higher plant load factors (PLFs) for coal plants (partly also due to slower commissioning), higher merchant volumes being sold on exchanges and Independent Power Producers (IPPs) reporting stronger-than-expected profit growth.

The Government, too, Morgan Stanley said, has stepped in to improve supplies by allowing imported coal to be a pass through, buying gas-based generation in crunch periods, improving domestic coal logistics, as well as better plant maintenance scheduling etc.

"We think momentum on renewable energy (RE) auctions, thermal coal and transmission awards is set to accelerate in the coming months; we believe battery energy storage systems (BESS) and pumped storage projects (PSP) will be complementary to conventional power, as India, with the 3rd largest power market globally, will need to tap into all sources of generation & storage," Morgan Stanley said on Power sector.

Given this, the global brokerage expects the gross block for regulated utilities to grow at a high single digit CAGR, while independent power producers (IPPs) to grow 20 per cent in the next three years.

A gross block is the total book value of a company's tangible assets before depreciation.

Furthermore, Morgan Stanley sees upside risks to capex and earnings as leverage but also thinks valuations have to be seen in the context of growth, its visibility, and leverage, not just return ratios.