Tata Power Limited

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The Business

Tata Power (TPR) is India’s Largest Integrated Power Company with a generation capacity of 12,808 MW reaching 12.1 million customers. It has been the No 1 Solar EPC player seven years in a row with more than 30% in clean energy.

Tata Power, formerly a part of the three entities jointly known as Tata Electric Companies, is a pioneer in technology adoption and is India’s largest integrated power company.

TPR has started focusing on new age businesses in addition to its regulated business of power generation, transmission & distribution. EV charging, Solar rooftops, Solar pumps, Solar modules and cells, micro grids, utility scale solar EPC, solar RO systems and home automation systems are its new ventures and will drive the business of the future.

They have started investing in intellectual property and has received 2 patents in FY21.

GLOBAL INDUSTRY DETAILS

  • With an increasing number of nations responding to the challenge of climate change, the energy landscape is undergoing change, with greater focus being lent to cleaner sources of energy. More than 100 countries have pledged carbon neutrality by 2050 and many more such commitments are on the horizon.
  • Renewable capacity addition has beaten all previous records, with more than 260 GW being added in 2020, exceeding 2019 growth by 50% as reported by IRENA (International Renewable Energy Agency)
  • Share of renewables in new capacity additions rose considerably for the second year in a row, accounting for more than 80% of the capacity additions, with solar and wind accounting for 91% of the renewables.
  • As per International Energy Agency (IEA) World Energy Outlook 2020, renewables are expected to overtake coal as the primary means of producing global electricity in 2025.
  • As per a Hydrogen Council report, there are more than 200 large-scale projects for a combined $ 300 billion of proposed investment through 2030.
  • The three Ds – Decentralisation, Decarbonisation and Digitalisation – are driving transformation of the energy sector, creating opportunities for new business models like Energy-asa-Service (EaaS), which is likely to further disrupt the utility sector.

INDIA INDUSTRY DETAILS

  • Govt of India plans to raise renewable energy capacity from targeted level of 175 GW in 2022 to 450 GW by 2030.
  • Another major focus area of the government has been increased participation of private players in the Transmission and Distribution (T&D) space, through the Tariff-based Competitive Bidding (TBCB) route in transmission and PPP (Public-Private Partnership) or franchisee models in the distribution segment in a bid to improve performance. Distribution continues to be
  • The weakest link in the power value chain, which faces challenges of high Aggregate Technical & Commercial (AT&C) losses, insufficient tariff hikes resulting in a widening Average Cost of Supply (ACS)–Average Revenue Realised (ARR) gap, accumulation of regulatory assets and cross-subsidisation.

Transformation plans for the future:

  • New business: From a commodity player to a service provider for the end consumer.
  • Customer growth in focus: From a ~ 3 million customer base in FY’ 20 to 20 million customer base in FY’25.
  • Portfolio transformation: From a 30% clean portfolio to over 60 % Renewables portfolio in FY’25.
  • Growth scale-up: From 12.8 GW to 25 GW capacity in FY’25.

Rooftop solar

  • Market to grow from 6.6MW to 30MW by FY25
  • Target of 5000 cr of revenues from solar roof tops by FY25

Residential and Industrial rooftop solar:

  • 30,000+ total & 15,000+ residential customers.
  • 500+ MW installed, ~40% CAGR (FY18-21)
  • Ranked No 1 Solar EPC Player for 7 years in a row
  • Pan India network of 250+ Channel Partners

Solar-powered water pumps:

  • Over 35,000 Pumps across India
  • Market Leader in Solar Pumps.
  • Govt is encouraging the use of solar pumps for irrigation purposes under the KUSUM scheme with a 60% subsidy. The aim is to reach 3.5 mn farmers. Tata Power has 30K+ and is expecting to reach 1L+ by FY26.

Future Plans

  • TPR has decided not to invest any further capital into coal based generation. TPR will phase out coal-based generation completely as their respective power purchase agreements (PPAs) expire, e.g. Maithon FY35, Mundra FY37, Trombay extended by five years to FY24 and Jojobera FY31/32.
  • TPR has planned to move to 60% clean energy by FY25, 80% by FY30 and 100% by FY50.
  • TPR expects commissioning of 900MW of its Renewable Energy projects over the next 6-9 months. It has doubled its solar PV manufacturing capacity to 1,100 MW of cell and modules under Tata Power Solar Systems Limited.
  • The management expects to incur a capex of Rs.7000-8000 cr in FY22. Around 50% of this would be for its Renewables portfolio, while another Rs.1000 cr is related to Odisha DISCOMs.
  • The company has prepaid 1,500 crs of 11.4% perpetual debt. The net debt slightly increased to 38,898 crs. The prepayment of high-cost debt has helped reduce the interest cost from 7.99% last year to 6.95% this year. The net debt to equity stood at 1.7-1.57 compared to 1.81 last year. Net debt to underlying EBITDA has also come down to a healthy 4.1x.
  • Company expects Solar EPC to boost up its earnings for the next two years. The large-scale utility EPC order book continues to grow, with orders worth 743 crs won in Q1FY22, taking the total order book as on 30 June at 7,257 crs.

The future focus is on renewables

  • Renewable energy unit IPO: Company is planning to raise just over Rs. 3,500cr by listing its renewables business.
  • The company has a roadmap to be one of the major players in India in EV charging. It has tied up with OEM partners to provide home charging facilities to EV car buyers.
  • It has set up close to 500 public charging points in nearly 100 cities and plans to expand to over 3,000 charging points in the next one year. It has also collaborated with fleet owners which serves as an assured revenue model. TPR plans to extend their charging points to 1 lakh by FY25.
  • They have collaborated with Central Railway to launch EV charging points at Mumbai’s railway stations.

Electricity Amendment Bill 2021

De-license power distribution
  • Allowing private sector players to enter the sector and compete with state-owned power discoms
  • Giving consumers a choice to choose a distribution company in their area
  • Universal service obligation to ensure companies do not cherry pick customers
Mandatory Renewable Purchase Obligation (RPO)
  • Penal provision for missing purchase obligation
Experience from Orissa to manage urban, rural and semi-rural to be very helpful
  • Tata Power has taken over the entire state’s power distribution
  • Orissa distribution to be profitable by FY22

Tata Sons is backing the changes

  • Tata Sons has reposed faith in the company and has bought into 2,600 cr of equity share capital on preferential basis. This has resulted in Tata Sons’ shareholding going from 35.27% in FY20 to 45.21% in FY21.
  • Dr. Praveer Sinha is the CEO & Managing Director of the company and is a PhD. from IIT, Delhi with over 36 years of industry experience. He is also the Co-Chairman of the CII National Committee on Power as also on various Industry bodies. He is one of the most well-respected people in the industry.
  • TPR tops the CRISIL ESG score for power companies in India.

Risks and Challenges

  • Distribution continues to be the weakest link in the power value chain, which faces challenges of high Aggregate Technical & Commercial (AT&C) losses, insufficient tariff hikes resulting in a widening Average Cost of Supply (ACS)–Average Revenue Realised (ARR) gap, accumulation of regulatory assets and cross-subsidisation.
  • COVID-19 induced challenges led to further deterioration in the financial position of Discoms as the deferment of bill payments by consumers reduced collections, thereby putting pressure on their revenues and limiting their ability to pay the Generating Companies.
  • Receivables have increased from 4500 cr as of Mar-20 to Rs5600 cr as of Mar-21, however, they have remained stable at 55 days of sales in FY21.
  • Fluctuation in coal prices and / or USD-INR currency can create challenges for the Mundra UMPP as it is dependent on imported coal.

Financials

Screener - Tata Power Company Ltd financial results and price chart - Screener

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  • The company has a low ROCE of 7.36% which is likely to increase with reduction in debt and increase in margins with higher margins coming in from new customer focused businesses.

  • Orissa discom was loss making in FY19. It is expected to be profitable in FY22 under TPR which should aid in the increase in profits.

  • The company has been generating healthy free cash flows in the last 2 financial years.

  • TPR is planning to merge Mundra UMPP with the parent company. This is help in reducing tax outgo due to accumulated losses.

DISCLOSURE: INVESTED. MAY CHANGE OPINION AT ANY TIME.

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In depth analysis posted by SOIC

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This will be contentious but I believe the strategy to go 100% renewable is catastrophically wrong. Not because of climate change or anythng but basic calculus of a growing country energy demands and the RE land required to meet the same demand. This is already playing out in EU where Germany, France and UK are paying a lot higher prices for electricity in spite of RE push. The ‘base load’ requirements are not even met in this country and this push for RE aggravate with the closure of plants.

We havent reached 5T$ economy and for that the energy requirements are huge. If you see the concall transcripts of NTPC, NLC, CoalIndia, it’s like they know RE but the need to get out more coal from the ground is really all they are looking at.

Purely on the commercial sense, you will see China, Germany and UK restart their coal plants instead of permanently shutting them down. or go completely nuclear as China is plannng with salt thorium reactors.

I urge you to scroll https://twitter.com/anasalhajji feed to see his take on energy mix and use.

In all of the above, I’m just trying to say, switching out of coal wont make economic sense FOR India.

Invested in TPower

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This twitter thread might be of use in modeling what might happen to powergen and distributors. Posting only because Tpower is mentioned twice at least

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Key points:

  • 10 GW of coal based plants are stranded today without coal in India (not of Tata Power)
  • Plants operating on LNG are also facing issues due to PNG price rise
  • During this time of the year, open cast coal mines are flooded and mining operations are stopped. causing shortages.
  • Power demand also has increased due to pickup in industrial activity
  • The situation should improve in the next few weeks
  • TPR does not do any mining activity in India but all its plants are near coal mines and have adequate supply of coal. All plants are operating at full capacity.
  • there is no impact on e-auction prices on domestic coal. Prices for imported coal have hardened.
  • Notification u/s 11 of electricity act has not yet been notified, so TPR cannot supply power from Mundra to power exchanges as of now. Awaiting notification from the govt.
  • Examining all options for the renewables business including bringing all renewable related businesses together and bringing them to the market.
  • No immediate plans to raise equity capital
  • Currntly have built 1000 charging stations with plans to aggressively expand across the length and breadth of the country (a charging station every 100 km)
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It is a pro member article. Maybe you can share some key points. Thanks!

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Highlights
- Restructuring of assets and significant reduction in debt -
Strong focus on electric vehicle charging infrastructure -
Renewable portfolio growing faster leading to higher profitability *-
Valuation reasonable at 20 times fiscal 2023 estimated earnings.

All in all it says Valuation is cheap at cmp and prospects looks positive.

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That is acquisition of 5GW renewable assets( functional + work in progress ) at 26K cr, approx 5K cr per GW in over simplistic term. and its an all cash deal.

Tata power eying for 15 GW renewable by FY25. They are about 4GW by this year end( per screener approx 3 operational and approx 1 GW by this year end)

Tata has many more assets in adjecncies and overall ecosystem of renewable, good to see traction in theme and it may create push to expedite to carve out of RE biz and value unlocking.

Invested

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TVS Motor Company signs MoU with Tata Power to
collaborate on electric two-wheeler charging eco-system in
India.

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Sharing a very informative thread on Reddit about charging stattion economics. It doesn’t quite conclude. Does anyone here have more insight into viablity of charing station and how does that translate to revenue to Tata Power?

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I am not 100% sure, but Ola had mentioned somewhere that they will setup their own fast-charging network. Probably, few lacs of charging stations pan India.

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This video by PPFAS on EV is quite good and explains the different parts of EV infrastructure. It mentions that for EV chargers to break even, they need around 4-5 years of charging with around a particular number of charging done everyday. Tata Power is going strong in this but it makes me doubt the profitability of such business. Probably, EV adoption might turn out to be better than expected, and it might turn out to be breaking even in 2-3 years. Many of their consumer facing businesses might be loss making right now. I hope it changes in the future.

Disc: Invested

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The only issue I have with this is, basically the power generation at the backend. To provide a reasonable charging capacity for a bank of 15 cars within a recharge point you’d need significant power infra upgrade compared to what you see at the site now. Transformers, higher power cabling and such. The load on the eleccy system would be tremendous. Changing existing petrol bunks wont work as space is not enough for the power install alone. That leaves city outskirts and such. And massive increase in power generation requirements that needs to sustain a million(s) high voltage charging infra for hours on end.

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This Company has been giving a healthy Dividend, dividend payout around 33%. Sales growth is poor although

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EV charging infrastructure model is likely to have asset heavy as well as asset light models - based on target segments

Asset light

  • Target segment commercial/offices - similar model as Apartments could be applied here as well.

  • Target segment- govt and private bus fleets - govt may uses its own utility or have bidding based private player participation at their own depots. Private fleet ( bus, taxi etc) operators will be not in a rush to participate right away but eventually they may incline to private players with better infra and pricing.

While most of above will cover Tier1 city and to some extent Tier 2 cities, a sizable volume chunk of initial few years EV uptake can be covered here,

Asset heavy in inital phases
Tata’s own stations - while Tata needs to get footprint of their own initially to get initially offtake and acceptance, eventually it will be franchise driven

In regards to cost and breakeven - a question we need to ask is how does unit economics of EV charging stations vs Conventional petrol stations work- key cost advantages items being

  1. Lower fuel transportation and storage cost
  2. Lower manpower cost
  3. Lower real estate footprint ( remember load will be distributed with many charging at home/apartments etc)
  4. Lower overhead cost
  5. Higher software cost but has advantages on analytics front

From Tata perspective , they are backward integrated ( both generation and transmission) hence have inherent cost advantages and can attract franchises with better margins share.

While Tata aggression on end consumers Solution focus is visible and is ahead in reach and live footprint, eventually other giants such as Adani and Reliance will up the game too.

We are too early in evolution cycle, expect lot to change as EV adoption and Renewable Energy scale comes in.

Invested - for now renewable business scale followed by transmission business reach thesis.

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Tata power new tie up

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This AI Tie up recently done by Adani group as well.

Seems like an essential integration in value chain.

Both TATA and Adani will have significant operating leverage at some point.

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