Buy Tata Power Company; target of Rs 260: Sharekhan

Sharekhan's research report on Tata Power Company

Q2FY23 consolidated PAT grew by 94% y-o-y to Rs. 819 crore reflecting higher coal profits, favourable CERC order of Rs. 461 crore for capacity charge at Mundra, improved solar EPC margin and good standalone performance (higher power prices and dividend income). However, Rs. 151 crore in CERC order pertains to Q1FY23, adjusting for the same PAT of Rs. 668 crore (up 59% y-o-y) was below our estimate of Rs. 740 crore. Profits from coal business remained strong with a 13% q-o-q rise to Rs. 1,096 crore driven by elevated coal price. Solar EPC posted strong margin recovery to 11% (versus only 1% in Q1FY23) on deferment of low margin projects; however, RE generation PAT declined by 22% y-o-y to Rs. 123 crore. Within Odisha discoms, TPWODL PAT soared to Rs. 46 crore (versus a loss in Q2FY22) on lower AT&C losses. Mundra UMPP’s current arrangement has been extended by three months till December 2022 and the final CERC tariff is expected soon. Mundra UMPP turnaround (potential favourable CERC tariff and long-term agreement with states) and higher profitability at Odisha discoms are catalysts.

Outlook

We maintain Buy on Tata Power with an unchanged PT of Rs. 260. At CMP, the stock trades at 2.9x/2.6x FY23E/FY24E P/BV.