Tata Power Company shares trade at rich valuations; cut exposure: Nuvama

Nuvama in its latest note on Tata Power Company Ltd said while it likes the Tata group firm's renewable energy transition story, it feels risks outweigh rewards as the current stock valuation factors in more than its bull case. 

The brokerage said while Tata Power is targeting doubling its FY23 PAT to Rs 65,000–70,000 crore by FY27, it fears delays, as the outcome depends on completion of 15GW RE target and scale-up of captive solar manufacturing plant. 

"Despite assuming PAT targets as met on time, we find risks outweighing rewards as the CMP more than bakes in these triggers, given lofty valuation of 25x FY26E PE and 3.4x FY26E P/BV. Furthermore, profit growth may well be visible only when all RE additions start contributing fully to earnings by FY28," the brokerage said.

Nuvama said Tata Power's Q2 results were in-line, with adjusted PAT growth at 21 per cent YoY, driven by T&D PAT (up 42 per cent) and Renewables PAT (up 61 per cent), slightly offset by thermal generation, coal, and hydro degrowth of 6 per cent YoY. 

"T&D segmental PAT surged 42 per cent YoY to Rs 500 crore. Delhi Discom (TPDDL) was aided by regulatory one-off at Rs 85 crore from a tariff true up order for FY20–21, leading to a rise in regulatory asset by INR4bn. Losses in Tata Projects were offset by profits from Coal JVs. Cumulative impact of merger of WREL and TPSSL into TPREL is a cost of Rs 440 crore, weighing down adjusted PAT, which was in line with our estimate," it said.

In the case of renewable business, PAT growth at 61 per cent was led by higher EPC and commencement of newly built 4.3GW solar module and 2GW cell manufacturing (4.3GW cell plant shall achieve its full capacity by next month). 

"Pump Storage Project (PSP) in Bhivpuri (1GW) has received CEA approval and the construction work is likely to commence by Jan-25 though CoD is likely only by FY29. TPWR announced the acquisition of a 40 per cent equity stake in Bhutan’s Khorlochhu 600-MW hydro project (project cost estimate Rs 6,900 crore), but it is awaiting financial closure," it said.

Nuvama has retained its 'Reduce' rating and suggested a target price of  Rs 346 for Tata Power Company. The scrip closed at Rs 427.15 on Wednesday, up 0.42 per cent.