JM Financials upgrades Tata Power to ‘buy’ after shares hit 52-week high, sees 24% upside over revised TP

Tata Power Share Price Today: Shares of Tata Power were locked at over 10 per cent upper circuit at ₹332 apiece on the BSE, hitting its 52-week high-mark on Thursday, December 7. Domestic brokerage firm JM Financials has upgraded its rating from ‘hold’ to ‘buy’ on the stock and raised the target price by 59 per cent over the recent uptrend in share price.

At a current market price (CMP) of ₹325.75, JM Financials has given a revised target price of ₹350 for Tata Power, which is 59 per cent higher than previous target of ₹220 and sees a potential upside of 24.3 per cent on the stock.

Also Read: Tata Power shares hit new high, becomes sixth Tata group company to cross ₹1 lakh crore market cap

‘’We have valued the company on the basis of SOTP method giving a target price (TP) of INR 350 which indicates 24 per cent upside from CMP of INR 282, implying 1.8x FY26 blended P/B & 9.3x FY26 blended EV/EBITDA,'' said JM Financials in its report.

Tata Power Share Price 

On Thursday, shares of Tata Power opened at ₹295.90 and surged 12.2 per cent to hit a 52-week high of ₹332, against a previous close of ₹294.10 apiece on the BSE. The company has a turnover of ₹262.57 crore, according to BSE.

Tata Power reported about a 9 per cent year-on-year rise in consolidated net profit at ₹1,017 crore for the July-September 2023 quarter, mainly on the back of strong operational performance. On Thursday, shares of Tata Power settled 10.76 per cent higher at ₹325.75 apiece on the BSE.

Tata Power hits ₹1 lakh crore market cap

While surging to the new high, Tata Power shares went on to become sixth Tata group company to cross over ₹1 lakh crore market cap during Thursday deals. This is the second Tata group company that has achieved ₹1 lakh crore market cap this week. Four other Tata group companies that have a market cap of more than ₹1 lakh crore are Tata Consultancy Services (TCS), Titan Company, Tata Motors and Tata Steel.

Tata Power has raised its capex plans and recalibrated renewable energy strategy. JM Financials has initiated a ‘buy’ rating on the stock and estimates that the company's increasing asset base and better margin profile will support expansion an g growth. Here's why the brokerage is bullish on Tata Power:

-Recalibration of renewable strategy:

The company has recalibrated its strategy to prioritise higher-margin group captive opportunities over third-party contracts. It has also shifted its focus from the low-value solar-powered irrigation pumps to optimise management bandwidth for more lucrative prospects. 

Among the current 3,760GW of projects under construction, 1,271MW are captive projects, representing 33 per cent of the renewable energy pipeline (which is expected to grow steadily). The recent order from Tata Steel for a 966MW RE-RTC project exemplifies this new strategic direction.

Tata Power presently holds a green energy portfolio of 5,521MW, accounting for 38 per cent of its generation mix. With 3,760MW under construction, it is aiming to surpass 15GW by FY27 and exceed 20GW by FY30.

-Mundra heading towards a long-term resolution:

Tata Power secured the 4,000MW Mundra UMPP in 2007 through competitive bidding, offering a levelised tariff of ₹2.26/kWh for supplying 3,800MW to a number of state discoms. 

The project, commissioned in 2012, relied on imported coal, prompting the company to acquire 30 per cent stake in an Indonesian mining company. However, an unexpected change in Indonesian law in Sep’11 significantly escalated coal costs beyond initial projections, rendering the project financially unviable.

Also Read: Tata Power share price rise 4% after winning ₹1,500 crore worth transmission project in Rajasthan

Given the increasing power deficit, the Ministry of Power has been repeatedly imposing Section-11 of the Electricity Act, 2003, asking imported coal-based power generating companies to mandatorily operate given the circumstances. As a result, the plant is at breakeven at PAT level and is generating cash profits.

‘’Against this backdrop, we expect state discoms to sign the ‘cost-reflective’ long-term PPA or continuation of Section-11 for Mundra before Jun’24 (when the latest extension to Section-11 expires),'' said JM Financials.

-Capex to grow 2x (FY24-27/FY20-23):

Tata Power is targeting to invest around INR 600bn until FY27 across generation, transmission, and distribution (2x of capex during FY20-23). A significant portion, 45 per cent, will be allocated to bolstering renewable capacity. This allocation signifies a substantial increase.

-Growth momentum to gain pace:

JM Financials said, ‘’We expect a consistent growth trajectory for the company and forecast Revenue/EBITDA/PAT CAGR of 15 per cent/23 per cent/32per cent by FY26. However, the management's aspiration to double the FY23 Revenue/EBITDA/PAT by FY27 appears ambitious. We would be observing the execution progress and further refinement of strategies before building these targets in our estimates.''

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