Tata Power shares fall 7% on weak Q3 performance; key variables to watch out for over 12-18 months

Shares of Tata Power dropped nearly 7% to hit a day's low of ₹365.95 during Monday's intraday trade on NSE after the Tata Group company reported muted post-tax profit for the third quarter of FY24. Around 12:46 pm, the stock was trading 5.89% lower at ₹369. However, the stock has risen 12% so far this year.

Post its quarterly results, Morgan Stanley has a price target of ₹213 on the stock, CLSA finds it worth ₹249 while Kotak and JM Financial see the stock at ₹240 and ₹440, respectively. That said, most price targets for the stock stood in ₹213-440 range.

Domestic brokerage Nuvama anticipates flattish-to-low growth over FY24-25E amid falling coal realisations as it sees rising contribution of renewable energy to take two–three years to play out. Nuvama is watchful of upcoming growth potential from pumped hydro, rooftop solar, C&I PPAs with Tata group for RE, and new distribution privatisation.

"Tata Power had cut its FY27 PAT guidance by ₹2,000 crore. While the RE business is yet to reach 3-4GW additions/year required to meet FY27 PAT targets, falling coal profits remains a drag. Despite our bull case of CGPL profits u/s11, Coal at 130$, and RE at ₹40,000 crore deal value, we find 23% downside," Nuvama said.

For now, the brokerage has cut its rating on Tata Power to 'Reduce' from 'Hold' with a revised target price of ₹303, suggesting a potential downside of 23% from the current market levels.

According to Kotak, Tata Power's Q3 profit benefited from a one-off dividend of ₹400 crore even as the combined earnings from coal and Mundra UMPP were down to ₹89 lakh in the quarter. The extension of Sec 11 tariffs up to June 2024 as well as the bottoming of the prices of imported coal will likely reduce near-term earnings volatility, with incremental growth hinging on profitable contribution from the renewable business, it said.

The brokerage maintains 'Sell' with a revised target of ₹240 per share as Kotak explicitly forecast project wins of 4.7 GW under the renewable segment.

CLSA has a 'Sell' rating on Tata Power with a target of ₹249 per share. As per the global brokerage, Tata Power reported a weak Q3 due to net long coal position and weak renewable independent power producer profitability.

Key message from Q3 was that Indonesian Coal saw a big PAT decline after being a key profit driver over the last two years. CLSA added that PAT (Ex-Treasury) also fell for renewable independent power producers due to lower PLF but EPC did well.

Morgan Stanley, meanwhile, has an 'Underweight' rating on the Tata Power stock with a target of ₹213. The brokerage said that Q3 earnings miss was driven by slower growth in regulated business and lower margins in Utility Scale Renewables. Key positives for the business, as per Morgan Stanley, were the solar EPC business execution and improved profitability of coal JV in Q3.

Speaking to CNBC-TV18, Tata Power MD and CEO Praveer Sinha said the company's core business will enhance to not only 70%, but 80-90% of profitability in the next one to two years.

"This is the 17th consecutive quarter in which we have shown a growth in profit and earnings before interest, taxes, depreciation, and amortization (EBITDA). And the second thing is that this is a very satisfying quarter. Because our core businesses, which is our renewable and our transmission businesses and coal, have given more than 70% of our profit, which last year was only 40% and we were more dependent on coal profit last year because of high prices gave us a huge profit," Sinha said.

"But now that the coal prices have stabilised, we do not expect that sort of profit coming in, of course, they will give profit but not to the level that we had seen last year, which typically was a one off and was not seen even prior to that," Sinha said.

The Tata Power MD further said that the company will do less of third-party EPC business and will ensure better margin. "So, we earlier used to do more of third party EPC and less of our own utility scale. Now that we have ramped up the capacity of our own utility scale and group captive, we will do less of the third party EPC. So earlier which used to be about 50:50 outside and our own, we will now possibly have 70% of our own and 30% outside. So that's where we will ensure that our margins are better and we have much better control on the supply chain."