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Tata Power (TPCL) has announced: (i) consolidation of all green businesses (RE) under TPREL; and (ii) a binding agreement with a BlackRock-led consortium, which would invest Rs 40 bn in TPREL. The stake sale could be 9.76–11.43% contingent on FY23 results, and implies a pre-money equity value of Rs 310–370 bn (mid-point Rs 340 bn) for TPREL. We reckon the developer portfolio has been valued at FY23e EV/Ebitda of ~13x—a thumbs-up for the RE sector.

The deal value is slightly below our expectations. Even so, it is a very positive development for TPCL as: (i) it funds RE capex for the next three years; and (ii) the new structure optimises capital deployment and future fund-raising. Overall, the deal would fast-track RE growth.

Much-awaited stake sale gets going

The Rs 40-bn fund-raising will be by way of equity issuance of TPREL and compulsorily convertible instruments, and is likely to be concluded by Dec 22. The fund-raising must be used for future growth/capex in TPREL, comprising five distinct businesses: developer portfolio, utility EPC, solar pumps & rooftop solar, manufacturing and EV charging infra. The new deal, though delayed, is ~1.5x better than earlier InvIT valuations.

A positive spin for RE sector at large

TPREL has been valued at an integrated level. Hence,we reckon the EV charging and EPC business has been valued in a range of Rs 110–130 bn and the developer portfolio at Rs 210–230 bn.

RE growth likely to accelerate

In our view, the fund-raising is likely to provide enough growth capital for next 4–5GW of RE capacity additions (current 4.9GW) and 4GW of new manufacturing facilities. This will have a multiplier effect on earnings due to the integrated business model and possibly fuel TPREL’s operating profit 2.5–3x over the next three–four years. Besides, TPREL’s new structure would optimise cash upstreaming, and leverage management and fund-raising.

In the run-up to the deal, the stock rallied 20% in seven trading sessions. Hence, even though the deal is structurally positive, we expect the stock to level off in the near term. The triggers are playing out well: Mundra resolution and earnings upgrade given current coal prices are the near-term triggers.

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Author: Howard Caldwell