Tata Power charging ahead on business revamp and recovery

Power consumption directly and strongly correlates to economic activity. Generation has seen double-digit growth year-on-year (YoY) through June, July, and August, albeit on a low base.
 
The period between April and August has seen 15 per cent rise in generation (YoY). Merchant rates have also risen and coal supplies have been stretched by demand. Outstanding dues by distribution companies (discoms) are more or less flat.
 
Tata Power would be one of the beneficiaries of this resurgence in power demand. It beat estimates in the first quarter of financial year 2021-22 (Q1FY22) and has seen a surge in stock price as a result.
 
Tata Power reported 54.5 per cent YoY rise in consolidated revenues at Rs 9,968 crore in Q1. The acquisition of the Odisha discoms added to revenues, though there was a net loss of about Rs 20 crore, and a good performance in its solar segment, was backed up by loss reduction from the Mundra JV with Adani.
 
The Q1 Ebitda (earnings before interest, taxes, depreciation, and amortisation) increased 34.3 per cent YoY to Rs 2,324 crore. The operating margin fell, due to a rise in solar module prices, and there was an increase in transmission losses during the second wave. The profit after tax (PAT) rose 78 per cent to Rs 465 crore. In sequential terms, revenues were down 1.6 per cent, while Ebitda was up 60 per cent and PAT was down 3 per cent.
 
The company has successfully reduced its financing costs, due to deleveraging. It is reorganising the balance sheet with, for example, permanent debt being shifted from equity to debt and wind assets being transferred to the parent. It’s not clear if Tata Power Solar will also be merged.
 
Divestment-related measures and cash infusion from the promoter have aided in the debt reduction. Interest costs have declined 13 per cent YoY to Rs 950 crore. There are possible benefits if there is a merger of Coastal Gujarat Power (CGPL) with itself.

Operationally, the solar EPC foray and stronger renewables focus is also starting to pay off, as are the Odisha acquisitions. Tata Power is trying to increase its monetisation of Renewable Energy Systems. The move into renewables is gaining momentum with about 39 per cent current market share in EV charging and around 10 per cent market share in solar EPC. Solar EPC revenues jumped almost 500 per cent YoY to Rs 1,950 crore though Ebitda margins were just 3 per cent for the segment. The solar EPC order book is around Rs 8,500 crore. The solar pump and rooftop business has also seen strong growth on a low base. There are potential opportunities in the discom privatisation space as well.
 
It’s hard to make concrete estimates of the future because of the balance sheet reorganisation, the Odisha mergers, the probable CGPL merger, and maybe the solar merger. But the new renewables focus should lead to strong growth and the debt reduction should also give an upside. Profitability is likely to improve considerably.
 
The stock has gained 140 per cent in the last 12 months and 35 per cent in the fiscal year. It appears to be a strong momentum play in technical terms since it has comfortably outrun the market.