Hold Tata Power; target of Rs 79: ICICI Direct

Tata Power Renewable Energy (TREPL) has entered into a 100% share purchase agreement with Welspun Renewables to acquire the latter’s 1140 MW of renewable energy portfolio. Enterprise value (EV) of the deal works out to Rs. 9250 crore or Rs. 8.1 crore/MW. With the said acquisition TPREL would become the largest renewable energy company in India with 2300 MW of renewable capacity post acquisition. Also, the consolidated portfolio of Tata Power would cross the 10000 MW mark. The acquisition is sync with the group philosophy of renewable portfolio being 30-40% of overall generation portfolio as this deal would inch the same metric to 28%. In our view, valuations appear on the higher side.  EV/MW of Rs. 8.1 crore/MW is higher than current replacement costs of Rs. 6 crore/MW despite the fact the acquisition brings in quality operational assets, which have long term PPAs coupled with remunerative tariffs &  associated infrastructure (land & T&D evacuation infra).   

Though Tata Power will become the largest renewable company in India, the important monitorable would be whether the company dilutes stake in TPREL to augment funds for the acquisition or future prospects. Going  ahead, we believe the upcoming CERC order with respect to  compensatory tariff  can lead to a rerating of  the stock as Tata Power has  accumulated losses of over Rs 3000 crore related to  that. Improving performances of other subsidiaries augurs well for profitability, going ahead, coupled with low probability of extraordinary write-offs. We ascribe a HOLD rating to the stock given the stock has already appreciated from Rs. 60 levels and the overhang of incremental debt to fund the Welspun acquisition. This will inch up the debt equity ratio in the medium term.