A company that—despite undergoing a rapid transition—has continued reporting extraordinary growth for 12 consecutive quarters. This would perhaps be the most appropriate description of Tata Power. But in these times of Industry 4.0, where there is a discernible global shift towards renewable energy (RE) sources, the company’s road to transformation is not without its fair share of challenges. More so if you are an entity with a 107-year-old legacy that has 68 subsidiaries in India and overseas, along with 34 joint ventures and five associates across the entire power value chain.
“What is important for us is consistent performance... [which] is reflected in the market price and market capitalisation,” Praveer Sinha, CEO & Managing Director, tells BT on a busy November afternoon. “We have successfully come out of several challenges and our performance will help us give better returns to shareholders,” adds Sinha, even as he regularly checks his phone for any important updates from across the company’s gargantuan network.
During the BT500 period under review (October 2021-September 2022), the Tata Power stock outperformed the benchmark BSE Sensex, growing 36 per cent, compared with the Sensex’s 2.8 per cent fall. However, volatility has been much higher with the 52-week high touching Rs 298, while the low has been Rs 156.60, over the period under review.
The company has done fairly well during this period in terms of winning new solar Engineering, Procurement and Construction (EPC) orders and also bringing down the Aggregate Technical & Commercial (AT&C) losses at the three power utilities during the Covid-19-induced lockdowns, say analysts. Other noteworthy developments at the company include raising capital from a consortium led by BlackRock Real Assets to the tune of `4,000 crore in two phases by divesting 10.53 per cent stake in Tata Power Renewables as part of the company’s renewables push. “The investment would translate into a base equity valuation of Rs 34,000 crore and an enterprise value of nearly Rs 50,000 crore for a platform that will house all the RE businesses of Tata Power and will meet the equity capex requirement for the firm for [the] next three-four-year period,” says Anuj Upadhyay, Institutional Research Analyst at HDFC Securities.
The increased green energy adoption in the country has positively impacted Tata Power’s growth and, in turn, its earnings. The company has leveraged its first-mover advantage to capture significant market share across various business verticals like solar EPC, solar pumps, solar rooftop installations and electric vehicle (EV) charging, says Upadhyay.
“We are on a journey where we see a humongous opportunity, especially in areas of renewable business. Whatever we are doing here in India is just the tip of the iceberg,” declares Sinha.
But this expansion has also thrown up unique challenges. One is the delay in execution of solar EPC contracts due to a steep rise in module prices, which went up by up to 60 per cent to over `25 per watt. This also dented margins across its solar EPC division during Q4FY22 and Q1FY23. However, the margins were restored during Q2FY23, implying that the aggressive tenders have been executed and all newly bid or upcoming tenders include the high module prices.
Tata Power’s Mundra Ultra Mega Power Plant (MUMPP), being run by Coastal Gujarat Power Ltd (CGPL) SPV (special purpose vehicle) in Kutch district, reported a loss of Rs 484 crore due to lower Plant Load Factor (PLF) of 25 per cent and rise in fuel under-recoveries to Rs 1 per unit from Rs 0.16 per unit in Q3FY22. The company management has said that it is in advanced discussions with Gujarat and other states for supplementary power purchase agreements (PPAs) for fuel cost pass-through. This would reduce fuel under-recoveries and lower losses at Mundra.
From May this year, CGPL has been booking sales under Section 11 of the Electricity Act. This notification, which has been extended up to December 31, provides for full compensation of the cost of power generation by the buyer along with a certain profit to be determined by the regulatory body Central Electricity Regulatory Commission (CERC). The Ministry of Power has given an interim tariff based on which CGPL has been billing the buyers. “For capacity charges, CERC’s recent favourable order helped recognise Rs 460 crore additional revenue during Q2FY23—Rs 150 crore pertaining to Q1FY23. We believe, once CERC approves the tariff, `400-500 crore under-recovery of variable charges may be reversed in the coming quarters, resulting in further increase in profits,” says ICICI Securities in its review of Tata Power’s second quarter results.
“While the company seems to be taking the right steps in terms of diversifying its revenue model, it is the balance sheet that is still not out of risk. If you were to look at reported debt to Ebitda, it’s currently 3.5 times,” says Harshavardhan Dole, Energy Analyst at IIFL Securities. As Dole explains, typically, such high debt to Ebitda is vulnerable to cyclicality of businesses such as coal and solar EPC, where even the slightest compression may require the company to raise additional equity. “That is one area that investors have to be mindful of. But given Tata Power’s strength and the lineage it carries, raising resources should not be a challenge,” he adds.
In the coming years, power distribution, non-regulated businesses and renewables will be the company’s growth drivers. “Firstly, there are only a handful of companies in India that have the capability to make a significant improvement in consumer services. Tata Power is one of them. Secondly, it is looking at entering the bouquet of non-regulated businesses, including EV charging stations, home automation, solar pumps and solar EPC,” says Dole.
Tata Power’s Sinha explains the gradual shift towards unregulated businesses. “Earlier, where we had 90 per cent regulated and 10 per cent unregulated business, we will be moving to a mix where 60 per cent will be regulated and 40 per cent will be unregulated business, as that will give us the opportunity to drive the market based on the quality of service and improvements that we offer to command a premium on the services we offer,” he informs.
As for its third growth driver, the RE businesses, Tata Power has aggressive plans to increase the capacity to almost 15,000 MW from the current 3,000 MW, in a few years.
Under Sinha, the company has also pursued a bottom-up strategy to convince employees to adopt new technologies and solutions to ensure they don’t get bogged down by disruptions happening in the sector. Sinha says that the company will continue to rely on its culture of innovation and adaptability to power ahead in the decades to come.
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