Tata Power's strategic shift towards renewable energy and its expansion into the transmission and distribution (T&D) sectors are expected to fuel significant growth in the coming years. The company currently holds 10.5 GW of renewable capacity, with another 5.7 GW in various stages of development. With an emphasis on clean energy and government-backed rooftop solar initiatives, Tata Power plans to double its profit by FY2027 compared to FY2023. Sharekhan maintains a BUY recommendation with a price target of ₹540, highlighting the company's robust earnings potential and long-term outlook.

Renewable Energy Capacity and Expansion Plans

Significant Capacity Growth:
Tata Power currently boasts 10.5 GW of renewable energy capacity, with 4.8 GW already operational—comprising 3.8 GW of solar and 1 GW of wind energy projects. The company has ambitious plans to add 5.7 GW of additional capacity over the next three years, capitalizing on the growing demand for clean energy. This capacity expansion, coupled with the development of the 4.3 GW solar cell & module plant, positions Tata Power as a leader in the renewable energy sector.

Rooftop Solar Market Leadership:
Tata Power is a dominant player in India’s rooftop solar market, with a 13% market share. Supported by the government’s PM Surya Ghar Yojana, which aims to install rooftop solar on 1 crore homes over the next 3-4 years, the company is poised to capture significant growth. Its Tamil Nadu-based solar cell and module plant is expected to be fully operational by Q2FY25, further bolstering its capacity to meet rising demand.

Key Projects and Strategic Initiatives

New Transmission Projects:
Tata Power recently won two major transmission projects, worth ₹4,600 crore, under the Tariff-Based Competitive Bidding (TBCB) regime. These projects, Bikaner-Neemrana and Jalpura-Khurja, are crucial for expanding the company's presence in the T&D sector, enhancing its overall growth trajectory.

Investment in Pumped Hydro Storage:
In its push towards energy storage solutions, Tata Power is developing 2.8 GW Pumped Hydro Storage Projects (PSP) with an investment of ₹13,000 crore. This strategic initiative is aimed at addressing the growing need for reliable, clean energy storage, ensuring a stable power supply as renewable capacity increases.

Financial Outlook and Growth Projections

Doubling PAT by FY2027:
Tata Power has set an ambitious goal of doubling its profit after tax (PAT) by FY2027 compared to FY2023 levels. The company is expected to achieve a CAGR of 14% in revenue, 19% in EBITDA, and 27% in PAT over FY2024-FY2026. This strong growth outlook is driven by the company’s focus on renewable energy, distribution, and transmission businesses, as well as operational efficiency improvements.

Stable Debt Levels and Return Ratios:
Despite its aggressive expansion, Tata Power’s debt levels are expected to remain stable. The company is projected to achieve a Return on Equity (RoE) of 15% and a Return on Capital Employed (RoCE) of 11.3% by FY2026. These metrics underscore Tata Power’s ability to maintain financial discipline while pursuing long-term growth.

Valuation and Price Target

Maintaining a BUY Rating:
Sharekhan continues to recommend a BUY on Tata Power, with a revised price target of ₹540. The stock currently trades at 4.1x FY25E P/BV and 3.6x FY26E P/BV, offering significant upside potential. Tata Power’s ongoing business restructuring, combined with its focus on high-growth renewable energy and power transmission, positions the company for sustained earnings growth and improved valuations in the coming years.

Risks and Challenges

Potential Growth Constraints:Tata Power’s growth could face challenges if there is a slower-than-expected ramp-up of its renewable energy portfolio or delays in the expansion of its distribution business. Additionally, the company’s Solar EPC business may experience lower-than-expected profitability, which could impact overall earnings.

Conclusion: Tata Power's Path to Sustained Growth

Positioned for Long-Term Success:
With a robust focus on renewable energy and strategic investments in transmission and distribution, Tata Power is well-positioned for long-term growth. The company’s commitment to clean energy, supported by government initiatives and an expanding portfolio of renewable projects, offers significant upside potential for investors. The expected doubling of PAT by FY2027 reflects the company’s strong earnings visibility and disciplined approach to capital allocation, making it a compelling investment opportunity in the power sector.