Tata Power Sees Analyst Downgrades After Renewable Energy Deal – EQ Mag Pro

Most analysts downgraded Tata Power Co. Ltd. citing less-than-expected deal valuation for its renewable business.

The company has agreed to sell stake in its renewable business to a consortium led by the U.S.-based BlackRock Real Assets. The consortium, also comprising Saudi sovereign fund Mubadala, will invest Rs 4,000 crore in Tata Power Renewable Energy Ltd. via compulsorily convertible instruments for a 10.53% stake, according to a statement.

That values the renewable business at Rs 34,000 crore.

Besides, the company’s ability to scale up its renewable power business against competition such as Reliance Industries Ltd., Adani and NTPC Ltd., and a recent run-up in the stock prices made analysts cautious.

The shares have rallied more than 18% over the last one month compared with more than 5% gain in the benchmark Nifty 50.

Here’s what brokerages have to say about Tata Power:

Morgan Stanley

• Downgrades rating to equal-weight from underweight.
• Raises target price to Rs 244 from Rs 228 apiece.
• The stock lacks catalyst after green business monetisation and NCLT approval to Mudra merger.
• Assume international coal prices remain elevated and gradually decline over FY23-25.
• Raises earnings estimates by 2%, 142% and 22% for FY22,FY23 and FY24, respectively.

CLSA

• Maintains sell; raises target price to Rs 212 from Rs 195 apiece.
• The deal lifts its FY23- 24CL EPS estimates by 3%-5% on deleveraging.
• Key question ahead is how does Tata Power scales up its renewable energy business.
• Formidable competition from RIL and Adani on one side and sovereign-backed utilities such as NTPC on the other.

DAM Capital (Formerly IDFC Securities)

• Downgrades to neutral with target price at Rs 260 a share.
• Deal valuation at 13x FY24E EV/Ebitda below expectation by 20%.
• The deal at base case is valued at 14.7x FY23E EV/Ebitda and 12.7xFY24E EV/Ebitda.
• At the upper end, the stake is valued at 14.2X EV/Ebitda.
• The deal sets the valuation benchmark for the new energy businesses.
• High international coal prices and expected Mundra resolution are positives for the company.
• Sharp run up in stock prices leaves a little room for upside from current levels.

HDFC Securities

• Downgrades to sell from reduce; cuts target price to Rs 231 from Rs 277.
• Struck renewables energy deal better than the earlier monetisation plan through InvIT.
• InvIT is likely to be valued at 8x FY23 EV/Ebitda.
• Deal is below expected equity value of Rs 4,500 crore for the entire renewables portfolio.

Source: Bloomberg