Tata Power retains 'Buy' tag from Motilal Oswal; here are the key tailwinds

The analysts have set a target price of ₹480 per share, reflecting a comprehensive valuation of Tata Power's diverse business segments

Analysts at brokerage firm Motilal Oswal Financial Services (MOFSL) remain upbeat on Tata Group’s power-generating company, Tata Power (TPWR), and have reiterated their Buy rating, highlighting it as a key beneficiary of the government’s focus on liberalizing the distribution sector.

 

The analysts have set a target price of ₹480 per share on the Tata Power stock, reflecting a comprehensive valuation of Tata Power's diverse business segments. The assigned target price is nearly 20.78 per cent higher than its previous close of ₹397.40 per share on the BSE.

 

The key catalysts working in favour of Tata Power, analysts said, include the signing of the SPPA for the Mundra plant, award wins in the UP distribution tender, a pickup in the pace of award wins and execution in the renewable IPP business, and monetisation of non-core assets both domestically and abroad.

Tata Power poised to gain from electricity reforms

Notably, the recent draft Electricity Bill proposes allowing multiple licensees on a common network, potentially enhancing competition, reducing costs, and improving service quality. While the implementation of these recommendations will depend on state-level cooperation, the reform push reinforces the government’s commitment to enhancing the sector’s efficiency.

 

Tata Power is expected to benefit from these reforms as the company is also bidding for a distribution tender in Uttar Pradesh (UP) related to the privatization of power distribution in over 40 districts of Agra (Dakshinanchal) and Varanasi (Purvanchal), with private players likely to hold a majority stake. The tender is divided into five packages, and bidders are allowed to win a maximum of two packages.  ALSO READ | Brokerages see near-term upside in Dr Reddy's on Semaglutide, ex-US growth 

“Other key upcoming catalysts include the finalisation of a supplementary power purchase agreement (SPPA) for the Mundra plant and progress in installed capacity across the renewable independent power producer (IPP) and pumped storage businesses,” wrote the analysts in a research note.

Tata Power Valuation and target price

According to MOFSL, the valuation of Tata Power is segmented across various business units. “The regulated business is valued using a 2.5x multiple on regulated equity. The coal segment is valued based on equity with a 1.5x multiple of FY24 book value. The renewable segment is valued at a 14x multiple of projected FY27 Ebitda. The pumped storage segment is valued at 1x PB, while other segments are valued at 1.5x PB. Cash and investments add ₹60 per share,” said the analysts. 

The sum of these contributions, analsysts said, results in a target price of ₹480/share, reflecting the comprehensive valuation of TPWR’s diverse business segments.  ALSO READ | Brokerages divided on Aditya Birla Sun Life AMC post Q2; Buy or sell?

Potential headwinds

Key downside risks, the brokerage cautioned, include continued losses at Mundra due to the lack of progress with respect to SPPA, a sluggish pace of execution in the renewable IPP segment, delays in execution of upcoming capacities in the pumped storage project, and valuation pressure in the renewable IPP space.