What’s next for Tata Power? Investors await key triggers

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Capacity utilization at Tata Power’s Coastal Gujarat Power Ltd at Mundra, increased significantly from 37.5% a year ago to 60.4% on the back of Section 11 tariffs. The Centre had directed thermal generation companies using imported coal, such as the Mundra plant, to operate at full capacity in anticipation of peak power demand for which power producers would be fully compensated.

Another source of optimism was the reduction of aggregate technical and commercial, or AT&C losses at Odisha discom. Tata Power is also taking initiatives to improve collection efficiency for the discoms.

Most positives are, however, discounted in the Tata Power share price, leaving investors to wonder about the next key trigger, Rohit Natarajan, analyst at Antique Stock Broking, said.

Tata Power’s solar business is widely seen as a growth driver. Its subsidiary Tata Power Solar Systems reported a strong 68% year-on-year growth in execution. Having said that, Natarajan explained that execution at its solar EPC arm remained volatile and is facing delays in utility-scale projects, which means the segment did well in Q2 but performance must be monitored.

Tata Power’s future earnings hinge on the stability of Indonesian coal prices, renewable segment growth, sustainability of Section 11 orders for Mundra, which was extended until June 2024, and growth in solar EPC. “While we like Tata Power’s RE transition with green earnings overtaking coal or thermal by FY27–28, its near-term growth is capped,” said Nuvama Institutional Equities. It expects flattish to low growth for the power producer over FY24-25 due to falling coal realizations, while the increased contribution from renewable energy may take two to three years to materialize.

In Q2, Tata Power’s consolidated sales and net profit grew 9% year-on-year each to ₹15,442 crore and ₹1,017 crore, respectively. Last quarter, its power generation unit contributed 30% to its revenues, renewable energy (RE) formed 13% and power transmission and distribution accounted for 57%.

With rivals looking to expand their RE business, Tata Power’s rich stock valuations left investors on the edge, leading to the stock underperforming peers. In the past six months, shares of NTPC Ltd and JSW Energy Ltd gained 40% and 51%, respectively, while Tata Power’s shares have gained 24%.