TP up to Rs 150 on improved earnings, new business valuation; downgraded to ‘Reduce’.
Media reports suggest that Tata Power plans on monetising its green portfolio at a $6-7 bn valuation, which we think implies 4-15% downside from the current stock price. Our own valuation of the portfolio is even lower, at $5 bn, implying 27% downside from current levels. We believe TPWR doesn’t need to monetise/dilute its decently cash generating green portfolio but for paying down debt at its Mundra plant.
In our view, monetisation is also a reflection of the nature of these businesses which offer large opportunity but have a slower realisation pace given the multiple challenges. Hence, this valuation will cap the upside for the stock. That said, we note that falling global valuations for renewable assets and recent geopolitical issues could delay the monetisation plan.
We preferred earlier focus on small businesses. In 2020 TPWR focussed on monetisation of smaller, less significant businesses – defence, ships, Cennergy – which also brought down debt. This effort has now slowed, leaving distracting investments still on the books.
Core business issues already consume significant mgmt bandwidth. TPWR’s Mundra plant continues to generate losses and mgmt is still trying to negotiate a revision to the PPA. The coal production business in Indonesia is awaiting revision to its licensing terms and collection of sale proceeds from the Arutmin mine is still incomplete. TPWR is also yet to achieve its targeted reduction in AT&C losses at the Odisha discoms. And while the Delhi and Mumbai discoms are now in auto-pilot mode, changing the energy source mix will require attention. Solar EPC is a low margin business but requires management of module price volatility, land acquisition-related issues, among others. Its monetisation would bring more shareholders at the business level, further consuming mgmt bandwidth.
We raise TP to Rs 150 but downgrade to Reduce. We incorporate improved earnings from solar EPC and the coal mining business, and a valuation of the solar manufacturing business. We also roll forward our valuation to Mar’22. This results in an increased TP of Rs 150 (earlier Rs 100). Upside risks: (i) higher valuation for the green businesses, (ii) solution to Mundra power plant PPA, (iii) monetisation of other extant businesses.
https://www.financialexpress.com/market/investor-corner-tata-power-rating-reduce-green-business-monetisation-to-cap-upside/2447170/
