Sharekhan is bullish on the stock of Tata Power and has recommended buying the same for long-term investors. The firm sees multiple growth levels in the stock.
Why Sharekhan has a buy call on the stock of Tata Power?
According to Sharekhan, NCLT approval for merger of loss-making CGPL with Tata Power (standalone) would help save future tax outgo given massive accumulated losses at CGPL.
"We see an earnings upside of 10% from CGPL merger. Moreover, a potential agreement with states (already in talks with Gujarat) for full passthrough of fuel cost would result in significant earnings upgrades and aid Tata Power's valuation," the brokerage has said.
CGPL merger with Tata Power positive
Recently, the NCLT (Mumbai bench) has approved Scheme of Arrangement between Coastal Gujarat Power Limited (CGPL) and Tata Power for the merger of CGPL with Tata Power Standalone with effect from April 01, 2021.
"The merger would simplify the group holding structure and aid future growth, through fiscal consolidation and strengthening of balance sheet. The merger will provide a massive tax benefit to the parent given ~Rs14,000 crore accumulated loss at Mundra UMPP in the last 11 years due to adverse coal price and currency movements.
Potential lower tax outgo and better refinancing terms would result in earnings upgrades of 10% over FY23-24 for Tata Power. Additionally, Tata Power is in talks with Gujarat government (~1,805 MW PPA - 45% of total capacity of Mundra UMPP) for full pass through of fuel cost at its Mundra UMPP and any success on this front would significantly add to its PAT and valuation.," Sharekhan has said.
Valuation and view
Sharekhan maintains Buy rating on Tata Powerwith a revised price target of Rs. 315. "Tata Power's focus on business restructuring (CGPL merger), focus on high growth RE business and entry in to power transmission) and balance sheet deleveraging plan would play a crucial role for sustained earnings growth and improved earnings quality (expect RoE to improve to 11.7% in FY24E versus only 6.1% in FY21). In addition, management's business restructuring plans to increase share of high growth RE business would drive sustained improvement in ESG scores and RE portfolio monetisation to help unlock value. Hence, we maintain a Buy on Tata Power with a revised price target of Rs 315. At current market price, the stock is trading at 3.3x/3x FY23E/FY24E P/BV," the brokerage has said.