Recommendation from Power Generation/Distribution Sector

This column gives you a scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year 

TATA POWER COMPANY : IN A POWERFUL SPACE

HERE IS WHY
✓ Leading position in the power sector
✓ Developing next-gen charging solutions
✓ Integration with other Tata Group companies

P ower is among the most critical components of infrastructure, crucial for the economic growth and welfare of nations. In India, the existence and development of adequate power infrastructure is necessary for sustained growth of the economy. India is the third-largest producer and consumer of electricity worldwide, with an installed power capacity of 423.35 GW as of July 31, 2023. In order to meet the increasing demand for electricity in the country, massive addition to the installed generating capacity is required.

Keeping in mind the importance of the power sector, our choice scrip for this issue is Tata Power Company Limited, which is primarily involved in the business of generation, transmission and distribution of electricity and is India’s largest vertically integrated power company. It is also engaged in the manufacturing of solar panels and next-gen power solutions like electric vehicle (EV) charging solutions and home automation to integrated energy solutions (ESCO). It aims to produce electricity completely through renewable sources.

In Q2FY24, on a consolidated basis its revenue rose by 12.17 per cent YoY to ₹15,738.03 crore compared to ₹14,030.72 crore from the previous year’s same quarter. For Q2FY24, its PBIDT excluding other income increased significantly by 47.71 per cent. Its net profit stands at ₹765.89 crore from net loss of ₹284.22 crore in the previous year’s same quarter. Tata Power aims to achieve an installed capacity of 500 GW by the end of 2023. 

As of October 2023, the company’s installed capacity was 179 GW with 97 GW projects under implementation. The company is rapidly adding renewable capacity and creating a full supply chain solution for the manufacturing of solar modules, which is expected to be completed by Q4FY24. Trial production has started from the 4.3 GW cell and module plant. This will help the company to focus on cost reduction and efficiency improvement in renewable energy, making it more competitive with thermal power. 

Tata Power has recently acquired the power transmission business of the Bikaner-Neemrana transmission project. This is expected to be a significant growth driver in the future. The company has also started to focus on next-gen charging solutions like home and public charging. Under the public charging project it aims to build 1 lakh EV charging stations by 2025 which will help to charge passenger vehicles, fleet operators and buses. It is forging partnerships with fleet operators and signing deals with government agencies to deploy charging infrastructure for public transport.

Currently, the company is a market leader in the public charging segment with 55 per cent share. It also commands 85 per cent share in home charging installations. Apart from its singular growth as an independent entity, Tata Power also benefits from the vision of Tata Group with linkages to Tata Motors, Tata Chemicals, Tata Elxsi and Tata Technologies. The company is currently trading at a PE of 31.2 times as against the industry PE of 29.5 times. In the last three years it has delivered average ROE of 9.47 per cent and ROCE of 9.75 per cent. Considering the company’s business and its leading position in power generation and distribution sector, we recommend BUY.