After a detailed study of the past, present and future of Tata Power, we have decided to pick it as the Fortune Scrip for this fortnight. But we were shocked when a part of the equity research community sidelined Tata Power. While HDFC Securities downgraded the rating of Tata Power from ‘reduce’ to ‘sell’ and brought down the target price from Rs 271 to Rs 232, another research analyst placed the target price of the company at Rs 200. Yet another analyst has further brought down the price to Rs 150, while one analyst went to the extent of insisting that the Tata Power would nosedive to Rs 100.

Stunned by these analyses, we once again studied the company and, having been doubly convinced, have gathered our courage in both hands and decided to select Tata Power as the Fortune Scrip for this fortnight. We strongly believe that the company will emerge as a solid multi-bagger scrip in times to come as its future prospects are electrifying.

The company, belonging to the illustrious Tata group, is the largest integrated power company, present across the entire value chain of conventional as well as renewable energy, power services and next generation solutions, including solar rooftop and EV charging stations. The century-old company – formerly known as Tata Electric — has pioneered technology adoption in the utility sector with many firsts to its credit, including setting up one of India’s first hydro-electric power stations in 1915. Together with its subsidiaries and joint entities, the company has 12,772 MW of power generation capacity of which around 30 per cent comes from clean and green energy sources. From energy-saving power services to making India EV-ready with multi-city EV charging stations and being India’s number one rooftop solar provider, the company has been continuously delivering green technology for the smart consumer.

The company has been going from strength to strength on the financial front. During the last five years, its sales turnover has expanded from Rs 7,537 crore in fiscal 2018 to Rs 11,108 crore in fiscal 2022. However, due to the Covid-19 pandemic, the operating profit, which had gone up from Rs 2,594 crore in fiscal 2018 to Rs 2,922 crore in fiscal 2020, declined to Rs 1,817 crore in fiscal 2021 and further to Rs 1,547 crore in fiscal 2022, while the net profit dropped from Rs 3,151 crore in fiscal 2018 to Rs 921 crore in fiscal 2021, before recovering to Rs 2,783 crore in fiscal 2022.

The company’s financial position is getting stronger, with reserves moving up from Rs 12,718 crore in fiscal 2018 to Rs 16,559 crore in fiscal 2021 before declining to Rs 10,560 crore in fiscal 2022. Even these reserves are 33 times the company’s equity capital of Rs 319.56 crore.

MOVING WITH TIMES

However we have not picked this company as the Fortune Scrip because of its past laurels and existing activities. We have done so as the company is undergoing a massive transformation of far-reaching significance. Moving with the times, the company will gradually do away with conventional thermal energy generation and aims to scale up its renewable energy portfolio from the current level of 4 GW to 15 GW by 2025 and to 25 GW by 2030, thereby achieving 80 per cent clean generation capacity, up from the current 31 per cent. Consider:

• The company’s big entry into the renewable energy segment has started attracting foreign investment. Over a month ago, the company’s renewable energy platform has already inspired two foreign investment firms – Black Rock and Mabadala — to invest a total amount of Rs 4,000 crore in Tata Power by way of equity for a 10.53 per cent stake in Tata Power Renewable, a subsidiary of Tata Power, translating to a base equity valuation of Rs 34,000 crore. The final shareholding will range from 9.76 per cent to 11.13 per cent on final conversion. The first round of capital infusion is expected to be completed by June 2022 and the balance funds will be infused by December 2022. According to Dr Praveer Sinha, CEO and Managing Director of Tata Power, “This inflow of FPI will support the company to pursue exciting opportunities that lie ahead in the coming decades.”
• The inflow of FDI will enable Tata Power to expedite the execution of its ambitious renewable energy develop plan to reach 25 GW power generation by 2030. Incidentally, India’s success in transitioning its energy economy from thermal energy to renewable energy is crucial to the world’s ability to meet its climate goals. The management expects full inflow of FDI in the days to come, say research analysts.
• The company’s march towards switching off thermal energy growth and switching on renewable energy growth will push the ESG score of the company. This in turn will raise the stature of the company which will enable it to attract FDI easily and loans at cheaper rates.
• Prospects for the company are highly promising as it is not only the largest power company in the country but is also on the road to huge expansion. At the same time, the country’s electricity demand is picking up pace. Of late, this demand is growing at a rate of 4.9 per cent with supply falling short of demand by 1.4 per cent. This is despite a 3.2 per cent rise in coal-fired generation and a 30 per cent rise in solar output. Prospects are bullish going ahead as economic activity after the second wave of the pandemic has driven electricity demand, resulting in a supply deficit due to an acute coal shortage. Going ahead, the growing urban population is trying to shift its focus towards affordable, clean and reliable power supply. This will lead to a huge scope for continued growth in the power sector.
• The company is acing the EV race. With a view with moving in tandem with the government’s aim of speeding up the manufacture of electric vehicles, the company has embarked upon an ambitious programme of setting up EV charging stations in the country. Today, there are around 70,000 petrol pumps that serve as the backbone of the country’s transportation industry. As the production of electric vehicles is on the rise, the country will need a large number of EV charging stations. Tata Power aims to emerge as the numero uno player in the segment. It has already installed around 1000 charging stations by now and by the end of the current fiscal year hopes to more than double that number to over 2,000 and in the next 5 years to 10,000. The company has entered into a partnership with group company Tata Motors to develop EV charging infrastructure. It has also entered into a strategic partnership with TVS Motor to set up a large dedicated electric two-wheeler charging infrastructure in the country.
• Thanks to the infusion of Rs 2,600 crore by the parent group, the company could bring down its debt from Rs 47,100 crore to Rs 39,500 crore in fiscal 2021. As a result, the interest cost dropped by 9 per cent to Rs 970 crore, which gave an uptick to the bottomline. With the inflow of FDI funds from Black Rock and its associates, debt will be reduced further from the next year, taking the company to a zero-debt status in the next few years.
• There are at least three developments which will go a long way in improving the profitability of the company. These are:
  1. The company has decided to re-enter greenfield power transmission projects.
  2. The company’s subsidiary, Tata Power Solar, is going strong in the segment of EPS jobs. The company has a robust order book of Rs 7,257 crore/Rs 1,000 crore/Rs 175 crore for solar EPC/solar motors/solar pumps.
  3. With the government planning to privatise the power distribution segment, the company is getting ready to enter this business. It has already acquired the Odisha power distribution business.

Viewed in all these contexts, the company is all set to make rapid strides going ahead and is very much ready for re-rating. Needless to say, the company is emerging as a high-potential multibagger. All discerning investors must include this stock in their portfolio.