Tata Power Company delivered a solid set of numbers on the back of strong performance in the coal business. Consolidated net profit increased 27% y-o-y to Rs12.64 billion.
During the year TPC’s installed capacity increased 421 MW to 2,785 MW. Moverover, the capacity expansion program remains well on track.
The Mundra project is now more than 23% complete and has been awarded contracts by PGCIL for new lines as well as for strengthening existing lines.
Work on Maithon proect is in progress as per schedule and PPAs have been signed with DVC, NDPL, WBSEB and PSEB.
Haldia’s first two units (45 MW each) have been commisioned and the third unit is expected to be operational soon. As generation from the Haldia project stabilises, we expect the contribution of merchant sales to increase.
As per the management, over the next three years, TPC would require equity infusion of about Rs55 billion to fund the capacity expansion projects. Of this, approximately Rs. 28bn can be funded through internal accruals.
For the remaining amount, company would need to either sell its nonstrategic investments or raise additional equity capital through equity dilution at the parent or subsidiary level.
We believe that the company will be able to sell roughly Rs8 billion through the sale of non-strategic investments; the remaining amount will require equity dilution, which at current stock prices, would necessitate an equity dilution of roughly 10% at the parent level.
In our valuation, we have baked in this dilution and have consequently added the embedded value of the capacity expansion projects currently in hand.
Our SOTP based valuation indicates a fair value of Rs1,163.6 for Tata Power, indicating an upside of 7.7% over the CMP of Rs1080.5.
We believe that the current price largely discounts the near-to-medium term growth potential, and thus downgrade the stock from Buy to HOLD.