The share price of Tata Power Co Limited sank over 3 percent in the morning trade on April 18 despite the company announcing a deal to sell around 10.53 percent stake in its renewable energy business to private equity giants Blackrock and Mubadala for Rs 4,000 crore.
Analysts believe that the decline in the stock price is reflective of investors already factoring in the possibility of such a deal in the renewable energy business, given the stock has nearly tripled in the past year.
The deal pegs valuation of Tata Power’s renewable business at $5 billion, or around Rs 34,000 crore, which also left little upside for further re-rating.
Brokerage IIFL Securities downgraded shares of Tata Power as it believes that the stock’s closing price on April 13 fairly priced in the deal’s valuation.
Indian stock markets were closed for trading on April 14 and April 15 on account of Mahavir Jayanti and Good Friday.
Brokerage firm Kotak Institutional Equities argued that the transaction pegs the valuation of Tata Power renewable business at 15 times enterprise value-to-operating profit, “likely capturing anticipated growth in the renewable segment, although the size of the equity raise falls short of anticipated de-leveraging”.
The renewable energy business has been in the limelight for investors over the past 18 months in light of the acceleration of government efforts to shift India’s energy dependence away from fossil fuels.
India’s commitment to becoming a net carbon zero economy by 2070 and a surge in capital expenditure announced by various Indian conglomerates in the space have also resulted in exuberance among investors.
Tata Power has a portfolio of around 4.9 gigawatt, of which about 1.2 GW is under construction. The renewable portfolio also includes fast-growing battery storage and electric vehicle charging infrastructure.
The Tata group company has laid down its ambition of clocking Rs 26,500 crore in revenues from the renewable energy portfolio by 2025-26.
Also read: Tata Power Co’s debt reduction plan to continue, may monetise assets: CFO
What will drive upside?
With the value unlocking in the renewable energy business out of the way and the reduction of debt on the company’s balance sheet largely on track, investors are likely to now shift attention to the company’s legacy power plant business.
Brokerage firm JM Financial Services is of the view that upside in the stock going ahead will hinge on imported coal prices.
“Management is hopeful of a permanent resolution of the UMPP tariffs with fuel cost pass-through with Gujarat Discom, but it may entail offset of proportionate coal profits,” JM Financial Services said in a note.
The brokerage said in the absence of tariff revisions to take into account the surge in imported coal prices in India, Tata Power could see Rs 2,000-2,500 crore loss a year due to plant shutdowns caused by higher coal prices.
That said, brokerage firm Kotak Equities raised its price target for Tata Power by 10 percent to Rs 220, primarily on account of higher sustainable coal margins as well as a stronger growth trajectory for Tata Power Solar leading to an earnings revision of 15 percent for 2022-23 earnings.
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