What’s next for Tata Power? Investors await key triggers

Shares of Tata Power Co. Ltd 7% below their all-time highs, reflecting the company’s focus on expanding its renewable energy business, and a positive outlook for power demand. This optimism is reflected in the Q2FY24 results with Odisha distillates and Mundra plant performing well.

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Tata Power’s Coastal Gujarat Power Ltd in Mundra saw a significant increase in capacity utilization from 37.5% a year ago to 60.4% due to Section 11 tariffs. The Center ordered thermal generation companies using imported coal, like a plant Mundra, to operate at full capacity in anticipation of peak power demand for which power producers would be fully compensated.

Another source of hope was the reduction in aggregate technical and commercial losses, or AT&C at the Odisha discom. Tata Power is also undertaking initiatives to improve the collection efficiency of the discoms.

Most of the positives, however, have been discounted in Tata Power’s share price, leaving investors wondering about the next trigger, said Rohit Natarajan, analyst at Antique Stock Broking.

Tata Power’s solar business is widely seen as a growth driver. Its subsidiary Tata Power Solar Systems reported a robust 68% year-on-year growth in completions. That said, Natarajan explained that execution at its solar EPC arm has remained volatile and utility-scale projects have been delayed, meaning the segment fared well in Q2 but performance needs to be monitored.

Tata Power’s future earnings are dependent on the stability of Indonesian coal prices, renewable segment growth, sustainability of Section 11 orders for Mundra, which have been extended to June 2024, and growth in solar EPC. “While we like Tata Power’s RE transition to green earnings overtaking coal or thermal by FY27-28, its near-term growth is limited,” Nuvama Institutional Equity said. coal realizations are falling, and it may take two to three years to realize the increased contribution from renewable energy.

In Q2, Tata Power’s consolidated sales and net profit grew by 9% year-on-year each 15,442 crore and 1,017 crore, respectively. Last quarter, its power generation unit contributed 30% to its revenue, renewable energy (RE) accounted for 13% and power transmission and distribution accounted for 57%.

As rivals sought to expand their RE business, Tata Power’s rich stock valuations left investors on edge, causing the stock to underperform its peers. Over the past six months, shares of NTPC Ltd and JSW Energy Ltd have gained 40% and 51%, respectively, while Tata Power shares have gained 24%.

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