Sharekhan has maintained a "BUY" rating for Tata Power Company Limited (TPCL) with an unchanged target price of Rs 540. The company’s Q2FY25 results revealed an adjusted profit after tax (PAT) increase of 22% YoY, driven by a solid performance in its renewable energy segment and strong results from the Delhi distribution business. With ambitions to expand its renewable portfolio by 5 GW over the next three years and a robust position in solar energy, Tata Power aims to double its PAT by FY27 over FY23. This long-term growth trajectory is supported by a well-defined strategy and significant investment in renewable energy (RE).

Q2FY25 Financial Highlights

Revenue Performance:
For Q2FY25, Tata Power’s revenue remained flat YoY at Rs 15,698 crore, slightly impacted by subdued power demand due to an extended monsoon season.

Profit Growth:
Adjusted PAT rose to Rs 1,067 crore, marking a 22% increase YoY, aided by improved performance in the Delhi distribution segment and RE business. The Delhi distribution business saw a PAT jump of 178% YoY to Rs 297 crore, primarily driven by favorable tariff orders.

Renewables Segment:
Tata Power’s renewable energy segment achieved significant growth, with the solar EPC business PAT rising by 95% YoY to Rs 144 crore. The newly commissioned 4.3 GW solar module plant contributed a PAT of Rs 66 crore, a notable recovery from last year’s losses.

Strategic Focus on Clean Energy

Renewable Capacity Expansion:
Tata Power aims to increase its RE capacity by 5 GW over the next three years, strengthening its leadership in India’s renewable sector. The company’s focus on the rooftop solar market, particularly in states like Uttar Pradesh, Rajasthan, and Odisha, is expected to yield significant growth, with potential for up to 1 crore rooftop installations supported by government initiatives.

Shift Towards Sustainable Energy:
In line with global and domestic demand for cleaner energy, Tata Power targets a twofold rise in its PAT by FY27 compared to FY23. With 42% of its current capacity (6,361 MW) derived from renewables, the company is committed to an energy portfolio that increasingly emphasizes sustainability.

Valuation and Recommendation

Target Price:
Sharekhan has assigned a target price of Rs 540, based on a sum-of-the-parts (SOTP) valuation model. At the current market price of Rs 429, this target indicates an upside potential of approximately 26%.

Revenue and Profit Growth Projections:
TPCL’s revenue is expected to grow at a CAGR of 20% over FY24 to FY27, underpinned by robust RE expansion and growth in the power distribution sector. PAT is forecasted to increase significantly, supported by operational efficiency in the renewables segment and management’s ongoing commitment to improve return on equity (RoE) to around 14% by FY27.

Investment Horizon:
With its strategic RE focus, Tata Power is well-positioned for sustained growth. Sharekhan recommends a long-term investment approach for shareholders, as the company’s operational shifts towards high-growth RE and transmission businesses are anticipated to yield stable returns.

Key Risks to Outlook

Renewable Energy Ramp-Up:
Any delay in expanding the renewable energy portfolio or challenges in the distribution business could slow Tata Power’s growth trajectory. The RE segment’s performance is particularly critical to achieving the anticipated CAGR in revenue and PAT.

Profit Margins in Solar EPC:
Lower-than-expected profitability in the solar EPC segment could impact Tata Power’s bottom line. Management is actively managing cost structures to maintain a steady profit margin amid rising competition and potential cost pressures.

Mundra Ultra Mega Power Project (UMPP):
Persistent under-recovery issues in the Mundra UMPP segment remain a concern. Efforts are ongoing to optimize operational efficiency and minimize financial drag on the overall performance.

Long-Term Strategic Initiatives

Investment in Rooftop Solar and Renewables:
Tata Power’s renewable energy capacity of 12.8 GW (including under-construction projects) positions it as a frontrunner in India’s shift toward sustainable energy. With plans to commission additional capacity by FY26, the company aims to capitalize on both industrial and residential demand for solar energy solutions.

Expansion into Distribution and Transmission:
Through distribution licenses across several states, Tata Power’s customer base now stands at 12.5 million. The company's strategic pivot from a business-to-government (B2G) to a business-to-consumer (B2C) model emphasizes direct customer engagement, improving profitability through a broader service portfolio.

Financial Ratios and Valuation Metrics

Revenue, OPM, and PAT Projections:

FY24: Revenue of Rs 61,449 crore with OPM at 17.5%, PAT at Rs 3,696 crore.
FY25E: Revenue expected at Rs 69,138 crore, OPM improving to 18.8%, PAT rising to Rs 4,861 crore.
FY27E: Revenue forecasted at Rs 86,602 crore with OPM of 19.5%, PAT reaching Rs 6,452 crore.
Valuation Ratios:

P/E Ratio: 38.0x for FY24, expected to reduce to 21.8x by FY27 as profitability strengthens.
RoCE Improvement: Expected to rise from 8.5% in FY24 to 11.7% in FY27, reflecting efficient capital deployment in high-growth segments.

Conclusion

Tata Power’s strategic emphasis on renewable energy and an increasing share of distribution and transmission business underline its long-term growth potential. With a projected doubling of PAT by FY27, Tata Power’s evolution as a clean energy leader offers substantial upside for investors. The “BUY” recommendation by Sharekhan underscores the company’s position as a promising investment in the energy sector. For those seeking exposure to India’s renewable growth story, Tata Power presents a compelling long-term opportunity.