Renewables biz may recharge Tata Power’s growth

As of December, Tata Power Solar had a large EPC order book for utility-scale solar projects, with orders worth  ₹15,885 crore for 3,612 MW of capacity. (Bloomberg)
As of December, Tata Power Solar had a large EPC order book for utility-scale solar projects, with orders worth 15,885 crore for 3,612 MW of capacity. (Bloomberg)

Summary

Tata Power expects strong demand trends to persist, but that may not be enough to drive growth

Tata Power Co. Ltd’s stock plunged 8% on Monday after the company reported sombre earnings for the December quarter (Q3FY24). Still, the power producer’s outlook is upbeat owing to an expected scale-up in its renewables business.

In Q3, the renewables segment’s revenue surged 30% year-on-year to nearly 2,484 crore, forming 15.5% ofconsolidated segment revenue.

Tata Power plans to shift towards clean energy. As on 31 December, the company’s operational capacity was 4,270 MW in the renewables segment. Tata Power Renewable Energy is currently executing projects totaling 4,752 MW, and Tata Power Solar Systems has 4,120 MW of projects under execution. The combined clean energy capacity will be over 10,000 MW in 12-24 months.

 

 

The company estimates renewables to contribute 45% of Ebitda by FY27, up from 32% in FY23. Tata Power expects to spend 45% of its 60,000 crore-capex on renewables between FY24 and FY27.

The company’s strategy to tap high-margin group-captive renewable energy opportunities, venture into brownfield pumped hydro storage, expand its transmission business beyond distribution, and continued running of the Mundra plant have positioned Tata Power for accelerated growth, said Sudhanshu Bansal, an analyst at JM Financial Institutional Securities.

As of December, Tata Power Solar had a large engineering, procurement and construction order book for utility-scale solar projects, with orders worth 15,885 crore for 3,612 MW of capacity.

Its cell and module facility of 4.3 GW is completed and will likely start contributing to earnings from Q4, starting with module manufacturing, and then cell manufacturing by Q1FY25, the company said in its Q3 earnings call.

Meanwhile, the solar rooftop business continues to see excellent traction with nearly 146 MW installed and nearly 87 MW of orders won last quarter.

The Indian government recently announced that 10 million houses will be provided with solar rooftop solutions. At the same time, Odisha distribution companies have shown signs of a stronger turnaround in Q3.

Apart from these, a large opportunity of 30-40 GW from rooftop solar and pump hydro storage would be key growth drivers for Tata Power, according to Abhijeet Bora, analyst at Sharekhan by BNP Paribas.

Meanwhile, Tata Power plans to start construction of 2,800 MW pumped storage projects in Maharashtra by mid-2024, including a 1,000 MW pumped storage project in Bhivpuri that is expected to be commissioned by FY27, and another 1,800 MW project in Shirwata that’s likely to finish by FY28.

As such, Tata Power’s earnings hinge on stability in the prices of imported coal, growth of the renewables segment, and continuation of Section 11 orders for the Mundra plant, which have been extended to June.

The Indian government has mandated thermal power generation companies utilising imported coal, such as the Mundra plant, to operate at maximum capacity in preparation for peak power demand. Under this directive, power producers would receive full compensation.

Tata Power expects strong demand trends to persist. The third quarter saw around 10% sequential growth in power demand. But that may not be enough to drive growth. Nuvama Institutional Equities anticipates flattish to low growth for Tata Power over FY24-25 amid falling coal realisations. Also, higher contribution from the renewables business may take two–three years to play out.

On Tuesday, the company’s shares recovered a bit, and investors are sitting on gains worth 79.5% over the past year. The company’s focus on scaling up its renewable energy capacity, and potential opportunities such as pumped storage projects and solid prospects in solar EPC are already priced in the stock valuation, points out Rupesh Sankhe, analyst, Elara Securities (India).

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