Fortune Scrip     

Published: July 15, 2023
Updated: July 15, 2023

Tata Power

Power pioneer with vast footprint

Among the companies belonging to the illustrious House of Tatas, there is one which has tremendous potential to emerge as a multi-bagger and is available in the market at a very attractive price. It is Tata Power — India’s largest integrated power company. This fortnight, we have selected it as our Fortune Scrip.

Over a century old, the company is a pioneer in technology and innovation, with many first to its credit. It has a total electricity generation capacity of 14110 MW, of which 37 per cent comes from clean energy sources. This integrated power company has the distinction of being among the top private sector ones with a presence in all segments of the power sector — fuel and logistics, generation (thermal, hydro, solar and wind) transmission, distribution and trading of power.

The company has spread its footprint overseas too. It has made strategic investments in Indonesia through a 30 per cent stake in coal trading company PT Kaltim Energy Resources, so as to secure coal supplies and the shipping of coal for its thermal power generation operations. Tata Power has invested in South Africa through a joint venture called ‘Cennergy’ to develop projects in South Africa, Botswana and Namibia. In Australia, it has made an investment in clean coal technologies, while in Bhutan it has invested through a hydro project in partnership with the government of Bhutan.

Tata Power is seen as an energy pioneer in terms of technology, process and platform. The company’s latest business integrated solutions, focusing on mobility and lifestyle, are poised for multi-fold growth. Since its inception in 1915, it has under its belt over a century of expertise in technology, leadership, project execution excellence, world-class safety processes and customer care, and driving green initiatives. In fact, the company is committed to lighting up lives for generations to come.

FINANCES BOOM

The company has made rapid strides on the financial front too. During the last 12 years, its sales turnover has more than doubled from Rs 26,069 crore in fiscal 2012 to Rs 55,109 crore in fiscal 2023, with operating profit inching up from Rs 4,884 crore to Rs 7,728 crore. Better still, its net profit was Rs 3,810 crore in FY2022, in striking contrast to a net loss of Rs 898 crore. The company’s financial position is also very strong, with reserves at the end of March 2023 standing at Rs 28,468 crore – over 88 times its equity capital of Rs 320 crore, that too after a 1:5 bonus issue in 1975.

But we have not selected Tata Power for its past laurels. We strongly feel that future prospects for the company are highly promising and the stock, which is available at Rs 220 a piece, will emerge as a multi-bagger within a period of 5 to 10 years. Consider:

• Tata Power, which has emerged as a catalyst for transformational changes in India's evolving energy landscape, is itself is now entering a significant transformation to reshape the its own as well as the country's energy future, and also to unlock a plethora of possibilities - greener, cleaner and sustainable. In the process, it is building up a future reliable enterprise. The company, which today generates 69 per cent of its electricity through fossil fuels, is moving in the direction of renewable energy. It plans to increase its share of non-fossil renewable energy to 40-50 per cent by 2025, then phase out all coal-based generation and become carbon net zero before fiscal 2045. This is in line with the company's objective and roadmap to reduce its carbon footprint and promote the use of green energy. It has earmarked a capex of Rs 7,500 crore to expand capacity in its renewable business.

E.S.G. TARGETS

• In line with its growth in renewable power capacities, the company has set targets across the Environmental, Social and Governance (ESG) parameters, continuously monitors its progress against the stated objectives, and proactively undertakes course connection if needed. Its plans to increase its share of high growth RE business will drive a sustained improvement in ESG scores. This will help in rerating the company's stock.
• Tata Power has undertaken an ambitious programme for financial restructuring in order to pare its consolidated gross debt of Rs 49,693 crore through divestments and cash flows to bring down its gross debt to around Rs 25,000 crore. It has entered into a binding agreement with a consortium led by BlackRock Real Assets, which includes Mubadala Investment Company, for an investment of Rs 4,000 crore in its renewable energy subsidiary called Tata Power Renewable Energy Ltd. This subsidiary will issue fresh equity capital to BlackRock and Mubadala.

At the same time, the company has decided to divest its non-core assets. It has already sold its 30 per cent stake in the Indonesian coal company. Now, it aims to sell its assets in Zambia and Georgia. Again, as the company's performance is steadily improving, it has a better cash flow and this will enable it to address its debt from its profits. All these exercises will make Tata Power's balance sheet healthy.

TIES WITH UTILITIES

• In line with its strategy on sustainable and clean energy development, Tata Power is steering the transformation of utilities to integrated solutions by looking at new business growth in EV charging and storage, distributed generation and rooftops, micro grids, and home automation and smart meters. It has developed successful public-private partnerships in generation, transmission and distribution. Examples are Tata Power Delhi Distribution Ltd with DelhiVidyut Board for distribution in North Delhi, Tata Power Ajmer Distribution Ltd with Ajmer Vidyut Nigam Ltd for distribution in Ajmer, Powerlinked Transmission Ltd with Power Grid Corporation of India for evacuation of power from the Tata Hydro plant in Bhutan to Delhi, and Maithon Power Ltd with Damodar Valley Corporation for a 1,050 MW mega power project at Jharkhand. Tata Power is serving more than 2.6 million distribution connections in India and has developed the country's first 4,000 MW ultra mega power project at Mundra (in Gujarat) based on super critical technology.

The company's shares are available at an attractive price level of Rs 221. Discerning investors should accumulate the stock with a long-term perspective. The stock is bound to emerge as a multibagger in due course.