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Tata Power’s transformation agenda awaits market, competition tests

Tata Power plans to double its revenue, triple profits and drive up the languishing return ratios as part of its transformation plan (Mint)Premium
Tata Power plans to double its revenue, triple profits and drive up the languishing return ratios as part of its transformation plan (Mint)

  • Tata Power is aiming to scale up sundry businesses to move away from legacy business
  • The transformation agenda is cheering investors, but many doubt if Tata Power can scale up renewable energy business in a time-bound manner and that, too, at remunerative tariffs

After NTPC Ltd, Tata Power Co Ltd has charted a new energy plan targeting transformation in the next five years. But unlike NTPC, which is largely focusing on capacity expansion in renewable energy, Tata Power is aiming to scale up sundry businesses to move away from legacy business.

In the process, Tata Power plans to double its revenue, triple profits and drive up the languishing return ratios. It aims to improve return on equity from 5.6% last fiscal to 12% in FY25. The stock is up 7% in Thursday's trade.

What's more, the company plans to achieve this keeping leverage in check. In fact, it aims to bring down net debt from about Rs40,000 crore at the end of June to Rs25,000 crore by April next year and maintain it at those levels.

Debt reduction is premised on sale of non-core assets, fund infusion by promoters and establishing infrastructure investment trust (InvIT) for renewable energy assets. The company is making progress on the former two and is seeing fund inflow. It aims to complete the InvIT in the current fiscal, which alone will take away Rs11,000 crore of debt from the books of Tata Power.

Upon launching the InvIT, Tata Power plans to keep adding assets to the platform and releasing capital (equity) for its new growth initiatives.

The company plans to expand its renewable energy capacity base from 4.1 gigawatt (GW) to 15 GW by FY25. It seeks to scale up engineering procurement construction (EPC), rooftop solar, solar pumps, and micro-grid businesses, driving fivefold rise in renewable energy business revenue. Besides, Tata Power plans to incubate new ventures such as electric vehicle charging and expand electricity distribution business.

Consequently, the capital deployed in the troubled Mundra power plant is expected to reduce. The share of regulated business, where the company is allowed to earn minimum returns, is expected to rise.

The transformation agenda is predictably cheering investors. But many doubt if Tata Power can scale up renewable energy business in a time-bound manner and that, too, at remunerative tariffs. Competition in this business is intense and buyers’ reluctance to pay higher tariffs is a big challenge.

Further, matching InvIT with the company’s capex needs is easier said than done. “A huge chunk of the funding would come from asset recycling (InvIT) and may carry risk of timing mismatch," analysts at IIFL Securities Ltd said in a note.

“We believe Tata Power should focus on its core business (generation/transmission/distribution) vs tiny gains from allied segments (solar EPC, pumps, etc.), which entail perils of hyper competition and add no material value. Improvement in financials of state electricity boards is key to Tata Power’s renewable energy portfolio scale-up plans as well as recycling assets in the InvIT," add analysts at IIFL.

Still, the focus on InvIT is a welcome. It will take-away a large chunk of Tata Power’s debt. This, along with a favourable resolution to Mundra power plant’s troubles, will bring material benefits to Tata Power.

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