Tata Power: Strong Q3 performance, but the valuations are high too

Analysts target prices vary, indicating an upside of upto 10 per cent to a downside of 5 per cent for the stock

Power utility Tata Power has declared good December 2021 quarter (Q3) results, with consolidated PAT up 73.3 per cent year-on-year (YoY) at Rs 552 crore and up 9 per cent sequentially while revenue rose 42 per cent YoY at Rs 10,913 crore (up 11 per cent QoQ). Ebitda was at Rs 1,735 crore, up 28 per cent sequentially but down 8 per cent YoY.

Part of the revenue gains were due to expanding the Odisha Discom operations and the solar subsidiary Tata Power Solar Systems (TPSSL) saw growth in terms of project execution. There are plans to step up solar module manufacturing capacity by 4 times (encouraged by the PLI scheme) and efforts are on to induct a strategic partner in TPSSL. Expenses in terms of Material costs rose 55 per cent YoY while Employee costs rose 101 per cent.

The thermal division (essentially coal) saw realisations more than doubling while the Odisha Dsicoms registered over 250 per cent growth in PAT. The TPSSL EPC sales growth at 69 per cent YoY was backed up by a rise in margins. Losses continued and grew at the Mundra UMPP to Rs 460 crore (from Rs 95 crore YoY), which had a negative impact on EBITDA. The company benefited from high realisations from its 30 per cent stake in an Indonesian coal mine, with global prices at a high.

The foray into the green ecosystem is maintaining strong momentum. At the earnings call , the company said it was investing Rs 3,400 crore to step up its solar cell manufacturing capacity to 4GW (1GW now) over the next 18 months. About Rs 1,500 crore should come back due to PLI incentives. The company also intends to add 2GW Renewable Energy (RE) capacity in 2021-22, the capacity add is around 600 MW so far. It’s target is 15GW of RE by calendar 2025. The revenue share of EV charging / ancillary services is small, but given rapid growth in infra (1,458 EV stations now), it could grow quickly. The company is signing MoUs with TVS Motor and Apollo Tyres to deploy charging stations. The solar EPC order book stands at Rs 10,000 crore vs Rs 9,260 crore QoQ.

The positives are better performance in Odisha, strong gains in the solar EPC segment, and going forward, the fixed cost situation at Mundra should improve through power sales to Gujarat. It’s unknown however, how long this arrangement could last. The high coal realisations from Indonesia could last through the medium-term but margins here may eventually normalise.

Analysts seem divided on the valuation though the consensus assessment is that the company will register a good performance. The stock has run up 170 per cent in the last year and it is very highly valued at 34 PE for a utility. It lost around 3-4 per cent on the results.

There could be some value unlocking if TPSSL is either spun off, or listed as a separate entity since green businesses get higher valuation. Target prices vary between stagnant (gains of 3-5 per cent over current price in the next 12 months) to 10 per cent gain, to 5 per cent downside.