ICICI Securities has reiterated its BUY recommendation for Tata Power Ltd. (TPWR), raising the target price from Rs 500 to Rs 541, reflecting a 23% upside from the current market price of Rs 440. The company’s aggressive focus on renewable energy, solar manufacturing, and improved operational performance in its distribution business underscores its growth potential. Tata Power’s Investor Day on December 6, 2024, highlighted its ambitious five-year strategy, including substantial capital investments and a significant boost in renewable energy capacity.

Investor Day Highlights: A Clear Roadmap for Growth

1. Capital Expenditure Target Revised
Tata Power plans to invest Rs 1.5 trillion by FY30, significantly up from the earlier target of Rs 600 billion by FY27. Approximately 60% of this capital will be allocated to renewable energy projects, with additional investments in pumped storage (10%) and transmission infrastructure (20%).

2. Revenue and Profitability Goals
The company has set a revenue target of Rs 1 trillion by FY30, with a profit after tax (PAT) goal of Rs 100 billion, doubling its current PAT. Tata Power also aims to achieve an EBITDA of Rs 300 billion by FY30, compared to Rs 127 billion in FY24.

3. Renewables Capacity Expansion
Tata Power is targeting operational renewable energy capacity of 15 GW by FY27 and 23 GW by FY30, up from the current 6.7 GW. The company’s total clean energy portfolio, including under-construction projects, is projected to reach 33 GW by FY30.

Key Drivers for Growth

1. Solar Manufacturing and Rooftop Projects
The company’s 4.3 GW solar cell and module manufacturing facility in Tamil Nadu is a cornerstone of its renewable energy strategy. Tata Power expects to produce:

3.3 GW of modules and 1 GW of cells in FY25.
4 GW of modules and cells by FY26.
Additionally, revenue from solar rooftop projects is forecasted to grow at a 36% CAGR, reaching Rs 110 billion by FY30, compared to Rs 17 billion in FY24.

2. Distribution Business Strength
Tata Power’s marquee distribution assets in Mumbai and Delhi, along with the recent addition of Odisha discoms, provide a stable revenue base. Operational improvements in Odisha discoms have been particularly noteworthy, offering potential for customer base expansion through parallel licensing opportunities.

3. Clean Energy Initiatives
Tata Power is doubling down on investments in hydro and pumped storage projects to complement its solar and wind energy capacities. These efforts align with the government’s focus on sustainable energy and carbon neutrality.

Financial Performance and Projections

Revenue and Earnings Trajectory

Key Takeaways:

Revenue is projected to grow at a 15.9% YoY rate by FY27, driven by clean energy and solar manufacturing.
PAT is expected to increase by 15.9% annually, reflecting operational efficiency and margin improvement.

Potential Risks

1. Project Delays
Delays in executing renewable energy (RE) projects, especially pumped storage and hydro initiatives, could impact growth projections.

2. Volatility in Regulated Revenues
The company’s heavy reliance on regulated businesses, which contribute over 70% of current revenue, makes it susceptible to changes in government policies.

3. Commodity Price Risk
Tata Power’s imported coal-based generation (Mundra UMPP) remains exposed to fluctuations in global coal prices, which could impact margins.

Valuation and Investment Thesis

ICICI Securities values Tata Power at Rs 541 per share using a sum-of-the-parts (SoTP) methodology, factoring in:

Renewables: Rs 338/share (63% of total valuation).
Distribution: Rs 73/share.
Generation and Transmission: Rs 47/share.
Coal Mining and Storage: Rs 61/share.
This revised target incorporates the company’s aggressive clean energy goals and solar manufacturing initiatives, rolling forward estimates to FY27.