Show of strength: Tata Power giving Street reason to cheer

Preferential equity issue, non-core asset sale boost sentiment

Shares of Tata Power have gained significantly over the past monthand-a-half, following developments related to the firm’s strategic turnaround and deleveraging plans. Given the positive implications for its balance sheet and reduction in concerns, there could be more gains, say analysts.

According to the latest development, Tata Power will issue 490.57 million equity shares on a preferential basis to Tata Sons, at ~53 apiece. This will bring in ~2,600 crore — likely to be used for debt reduction.

While the preferential issue is at a premium to its current price, investor confidence should get a leg up given that the group’s ownership in the power generation and distribution arm will increase to 46.9 per cent, from 37.2 per cent. The move — while being equity-dilutive — is also earnings-neutral, according to Edelweiss Securities, given the savings on interest costs.

On Thursday, the board gave an in-principle nod for setting up of an INVIT for the renewable business. This will help pare debt further, besides reducing investor concerns around the renewable business — which requires high capex commitment. The renewable business, with net worth of ~8,370 crore, had reported Ebitda of ~596 crore and net profit of ~76 crore in Q4FY20. It, however, accounted for a quarter of Tata Power ’s consolidated net debt of ~43,576 crore.

Renewable assets (2.6 Gw) will be transferred to the INVIT once a buyer is finalised, says Edelweiss Securities. The move will help offload up to ~10,700 crore, and release equity capital for other investments.

Analysts at Kotak Institutional Equities say other worries in the renewable business are the leveraged buyout of Welspun’s operations, receivables, and contract sanctity with various state governments looking to renege contracts. These concerns should also take a backseat.

Tata Power, targeting divestment of its non-core and certain overseas investments, completed the sale of South African JV ‘Cennergi’ for $112 million (~840 crore) in April, and in June entered into a definite agreement to sell its shipping business for $213 million (~1,600 crore).

Consequently, investor sentiment continues to improve, with the stock rebounding 83 per cent from its May lows. Rupesh Sankhe, analyst at Elara Capital, says investors will be enthused by promoters raising stake, which instils confidence. Sankhe, like other analysts with target price of up to ~60, sees more upside for the stock, which is trading at ~49.95. Regulatory clearance of pending supplementary power purchase agreements — with respect to its 4,000 -Mw Mundra plant — with five states could come as a shot in the arm, as it will help reduce the plant’s loss, which stood at ~890 crore in FY20.

Even if the company is able to get compensation of ~0.25 per kwh (based on Q4FY20 under-recovery), the target price may be revised upwards by ~12, say analysts.