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Tata Power Co. Ltd has laid out ambitious plans at its recently held annual analyst meeting. The company has scaled up its earnings target. It now expects its profit after tax (PAT) to more than quadruple by the financial year 2027 (FY27) from FY22. Two years ago, Tata Power had aimed to more than triple its PAT by FY25 from the FY20 level. The company’s profits have nearly doubled from around 1,230 crore in FY20 to 2,300 crore in FY22, primarily led by higher profits from coal mines in Indonesia because of better price realizations.

With higher profits, Tata Power intends to improve its return ratios. By FY27, return on equity (RoE) and return on capital employed are expected to increase to more than 13% and 11%, respectively. These measures stood at 8.5% and 8.9%, respectively, in FY22.

Shifting priorities 
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Shifting priorities 

Overall, this means Tata Power’s new targets could be a tall ask, but some analysts are reasonably optimistic. “While a four times/400 basis points increase in PAT/RoE looks aspirational, we do not rule out 2.5-3 times jump in PAT over the next five years, should the external environment improve," analysts from Edelweiss Securities Ltd pointed out. One basis point is 0.01%.

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What also stands out is Tata Power’s clear focus on the green business. From FY22 to FY27, 80% of capital expenditure (capex) of more than Rs1 trillion would be towards green businesses. This includes enhancing the utility-scale renewable installed capacity to 20 gigawatts (GW) by FY27 from 5.5GW in FY22. Further, by FY27, the company aims to increase solar rooftop revenue by more than six times and solar water pump revenues by over eight times.

Separately, 17% of capex allocation is towards transmission and distribution. Tata Power aims to increase the distribution footprint to 40 million customers by FY27 from 12.3 million in FY22. The company sees the approval of the Electricity Amendment Bill to be a game-changer as it would provide a path for private companies to enter the power distribution business.

The overall capex addition would take the total capital employed from Rs65,600 crore in FY22 to more than Rs1.6 trillion by FY27. However, it remains to be seen if this capex plan would deteriorate Tata Power’s debt-equity ratio. The company expects this metric to remain below 1.5 times by FY27. In FY22, the ratio stood at 1.53 times.

Meanwhile, for FY23, Tata Power’s profits are expected to benefit from elevated 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 notable gains. In the past year, shares of Tata Power have appreciated by 82%, even as the stock is down 23% from its 52-week highs seen on 7 April on NSE. “Tata Power’s shares have risen sharply in the past one year because of many factors such as anticipation of a deal at higher valuations in its renewable energy business, higher international coal prices, and expected resolution regarding the under-recovery at Mundra," said Rohit Natarajan, an analyst at Antique Stock Broking Ltd.

As such, a slower resolution regarding the Mundra issue has been a sore point for investors in the Tata Power stock lately. “A more permanent fix for the disputed compensation for Mundra could be a key catalyst for the stock in the near-term, though the Street has been disappointed on this in the past," said analysts from Kotak Institutional Equities in a report on 25 August. “Tata Power remains hopeful of a time-bound resolution to fuel cost under-recovery at Mundra," they said.

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ABOUT THE AUTHOR

Vineetha Sampath

Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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