Tata Power's focus on business restructuring and high-growth RE business and entry into power transmission would play a crucial role for sustained earnings growth, Sharekhan said. 
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Tata Power's focus on business restructuring and high-growth RE business and entry into power transmission would play a crucial role for sustained earnings growth, Sharekhan said. Tata Power Company Ltd (Tata Power) shares fell in Thursday's trade after the Tata group firm reported a 9 per cent year-on-year (YoY) rise in net profit on a similar growth in sales for the September quarter. Analysts were expecting 13-40 per cent rise in profit for the utilities company on a 6-17 per cent jump in sales. Going ahead, said analysts, the extension of Sec 11 tariffs up to June 2024 and the bottoming of the prices of imported coal would likely ease near-term earnings volatility, with incremental growth hinging on profitable contribution from the renewable business.
For the quarter, Tata Power's net profit was up 9 per cent YoY to Rs 1,017 crore, led by renewable energy (RE) portfolio and decent earnings from Odisha discoms, which offset the decline in coal profits.
Tata Power’s earnings from hereon, said Kotak Institutional Equities, are premised on stability in the prices of imported coal and their contribution to earnings, growth from the renewable segment and sustainability of Sec 11 orders for Mundra that have currently been extended to June 2024.
"We have revised our earnings estimates by 8.7 per cent for FY2024 and 2 per cent for FY2025 to factor in lower losses at Mundra, even as we bake in a more reasonable profitability ($25 per tonne) for the coal mines in Indonesia and incremental growth opportunities for the renewable business. Maintain SELL rating with a revised fair value of Rs 220 per share from Rs 200 per share earlier," Kotak said.
Following the quarterly results, the stock fell 2.3 per cent to hit a low of Rs 249.05 on BSE.
"Tata Power's focus on business restructuring and high-growth RE business and entry into power transmission would play a crucial role for sustained earnings growth (management targets for 4x rise in its PAT by FY2027E over FY2022) and improved earnings quality. In addition, management’s business restructuring plans to increase the share of high-growth RE business would drive sustained improvement in ESG scores. Hence, we maintain Buy on Tata Power with a revised price target of Rs 285," Sharekhan said in a note.
At the prevailing market price, the stock trades at 2.3 times FY25 price to book value (BV) and 2.1 times FY26 P/BV.
The power demand continues to improve and witnessed a 13 per cent YoY growth in the September quarter. The Tata Power management believes this trend may continue at least for the next 2-3 years. Globally, the downward trajectory of coal prices is arrested and is likely to remain stable going forward, analysts said.
"With stable cash flows from its regulated generation and distribution businesses, the company is focusing on increasing RE portfolio and cost-reflective long-term PPA for the Mundra plant. We maintain our HOLD rating on the company with a SOTP-based target price of Rs 230 per share," JM Financial said.
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