Tata Power Company Limited has laid out ambitious plans in its annual analyst meeting held recently. The company has raised its earnings target. It now expects its profit after tax (PAT) to more than quadruple from FY2027 (FY27) to FY22. Two years ago, Tata Power had set a target of more than three times its PAT from FY20 levels by FY15. The company’s profits have almost doubled FY20 to . 1,230 crore in 2,300 crore in FY 2012, mainly due to higher profits from coal mines in Indonesia due to better price realizations.
With higher profits, Tata Power is looking to improve its return ratio. By FY27, the return on equity (RoE) and return on capital employed are expected to exceed 13% and 11%, respectively. These measures stood at 8.5% and 8.9% respectively in FY12.
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Overall, this means that Tata Power’s new targets may be a tall question, but some analysts are quite optimistic. Analysts at Edelweiss Securities Ltd said, “While a four-fold/400 basis points growth in PAT/ROE looks aspirational, we do not rule out a 2.5-3x jump in PAT over the next five years, should the external environment improve.” ” One basis point is 0.01%.
Tata Power’s clear focus on green business is a highlight. From FY22 to FY27, 80% of the capital expenditure (capex) of over Rs 1 trillion will go towards green businesses. This includes increasing utility-scale renewable installed capacity to 20 gigawatts (GW) by FY12, up from 5.5GW in FY12. In addition, by FY27, the company aims to grow solar rooftop revenue by more than six times and solar water pump revenue by more than eight times.
Separately, 17% of the capex allocation is for transmission and distribution. Tata Power aims to increase distribution to 40 million customers by FY17, from 12.3 million in FY12. The company sees the approval of the Electricity Amendment Bill as a game-changer as it will provide a way for private companies to enter the power distribution business.
The total capital expenditure growth will take the total capital employed from Rs 65,600 crore in FY 2012 to over Rs 1.6 trillion by FY 27. However, it remains to be seen whether this capex plan will worsen the debt-equity ratio of Tata Power. The company expects this metric to be below 1.5x by FY27. The ratio was 1.53 times in FY22.
Meanwhile, for FY23, Tata Power’s profits are expected to benefit from the rise in global coal prices. That said, investors would do well to follow the trajectory of prices in the near future.
From a medium-term perspective, investors are sitting on significant gains. In the past one year, Tata Power shares have gained 82 per cent, even as the stock is down 23% from its 52-week high seen on April 7 on the NSE. Rohit said, “Tata Power shares have risen sharply over the past one year as its renewable energy business includes fears of deals at higher valuations, higher international coal prices and expected resolution regarding under-recoveries at Mundra. Huh.” Natarajan, analyst at Antique Stock Broking Ltd.
As such, a slow resolution with respect to the Mundra issue has been a sore point for investors in Tata Power stock lately. “A more permanent fix for disputed compensation for Mundra could be a significant catalyst for the stock in the near term, although the Street has been disappointed before that,” analysts at Kotak Institutional Equities said in a report on August 25. “Tata Power is hopeful of a time bound solution to address the reduction in fuel cost in Mundra,” he added.
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