Tata Power shares: 4 reasons why S&P Global upped its credit rating on Tata group firm

Tata Power Company Ltd shares are in focus on Wednesday morning after S&P Global Ratings upped its issuer credit ratings on the Tata group firm to 'BBB-' from 'BB+' earlier. The ratings agency said the outlook for Tata Power is positive. This is against its "CreditWatch with positive implications" rating that was in place since June 13, 2024.

The positive outlook reflects the outlook on the sovereign credit rating on India, given that the rating is capped at the level of the sovereign, S&P Global Ratings said.

Here are five reasons why S&P Global upped Tata Power's issuer credit ratings:  Tata Sons  S&P Global Ratings said Tata Power is strategically important to Tata Sons. The change in assessment reflects the greater operational integration and cohesiveness within the Tata group in recent years. This greater operational integration increases the longer-term commitment of Tata Sons to group entities as well as the incentive to provide support. Tata Power's integration within the group has strengthened in particular from the execution of energy transition strategies by various group companies and Tata Motors' growth in the electric vehicle (EV) business, S&P said.

"These strategies include setting up of solar power plants for Tata Motors, Tata Steel, Tata Electronics, among others. Tata Power also assists with setting up the charging infrastructure to support Tata Motors' EV business and joint bidding with Tata Motors for commercial EV projects," it said.

Extraordinary support

S&P Global said Tata Power's close linkage to the Tata brand and legacy as a key asset under the group's umbrella underpin its expectation of strong extraordinary support, if needed.

Reputational damage to the Tata brand would be a key driver of support in a hypothetical scenario of liquidity stress at Tata Power, it said. 

"The group has demonstrated such strong support in the past in cases such as Tata Teleservices Ltd., and the Mundra power project under Tata Power and Tata Steel Europe. Tata Sons has also injected equity into Tata Power, when needed, most recently in fiscal year ended March 2021," it noted.

Predictable cash flows

S&P said 85 per cent of the Tata Power's Ebitda comes from operations with regulated returns or stable renewable energy contracts. The SACP also reflects the company's more diversified and integrated operations compared with peers having a similar business risk assessment, it said.

"We believe the company's business profile will strengthen further over the next few years with likely capacity additions of at least 1 gigawatts (GW) of renewable power as well as expansion of its presence in the roof-top solar business and production of solar panels and modules," it said.

Capex Tata Power has continued to invest heavily, mainly to grow its renewable energy business. S&P said capital expenditure may average about Rs 15,000 crore over the next two to three years. 

"Although we expect this to increase leverage modestly, it is not likely to weaken Tata Power's credit profile materially. We also believe the company will adjust its investment plans prudently to manage its leverage," it said.

S&P said its rating on Tata Power is capped by the sovereign rating on India because of the company's high dependence on the domestic economy, which contributes almost all of its cash flows. 

"In a hypothetical sovereign stress scenario, we believe Tata Power's earnings could decline materially. Furthermore, its weaker liquidity position would provide a smaller buffer to withstand a sovereign stress scenario, though limited exposure to foreign currency liabilities limits the impact. Currently, less than 10 per cent of the company's debt is denominated in foreign currencies," it said.