Tata Power’s execution timelines in spotlight

One factor driving investor sentiment is the improved outlook on the back of the ramp-up in the solar module manufacturing plant and commissioning of the solar cell production plant.

Recently released September quarter (Q2FY25) results show that ramped-up solar manufacturing and lower fuel costs were instrumental in the company reporting better-than-expected consolidated Ebitda of ₹3,745 crore, up 21% year-on-year. Ebitda is earnings before interest, taxes, depreciation, and amortization.

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Tata Power’s current generation capacity is about 15 gigawatts (GW), including 6.4GW of renewable energy (RE). The company has increased its focus on RE across the entire value chain of solar manufacturing, EPC (engineering, procurement and construction) projects and generation. It is undertaking construction of 6.5GW of RE capacity to be commissioned by FY26-end.

In Q2FY25, Tata Power’s module manufacturing plant achieved 100% capacity utilization and is now fully operational. Moreover, one solar cell production line was commissioned last quarter, and the second is expected to be commissioned by December.

The order book

Tata Power’s consolidated revenue declined marginally last quarter due to lower power demand. The management projects higher power consumption in Q3 amid a harsher winter season.

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The RE segment, including solar EPC and manufacturing plants, clocked nearly 33% growth in Ebit (earnings before interest and tax) in Q2, taking its share in total to about one-fourth. Transmission and distribution Ebit, forming one-third of total, rose sharply by 42% aided by a favourable regulatory order for Delhi distribution business. Generation segment Ebit was up 9%, affected by operational issues at its largest plant in Mundra.

While the EPC business is gaining traction from Tata group companies, which account for nearly 60% of orders, the rooftop business is driven by various government incentives. Order books for solar EPC and solar rooftop stand at ₹16,000 crore and ₹7,000 crore, respectively. It has also received approval for a 1,000-megawatt pumped storage hydro plant (PSP), entailing an investment of ₹5,700 crore.

Despite the high upfront investment, PSPs are in focus as they are essential to eliminate a critical drawback of RE by providing round-the-clock power.

The company’s FY25 capex is projected to reach ₹20,000 crore. While its net debt/Ebitda ratio of 3.5x looks on the higher side, it recently secured a rating upgrade by S&P, which would help bring down its cost of funds. As such, Tata Power can be expected to benefit from projects coming online over the next 2-3 years.

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Still, the path ahead may not be smooth. Tata Power is looking to double its profit after tax by FY27 over FY23. “We fear delays, as it depends on the completion of the 15GW RE target and scale-up of captive solar manufacturing plant," said analysts from Nuvama Institutional Equities.

“Despite assuming PAT targets, as met on time, we find risks outweighing rewards as the current market price more than bakes in these triggers, given lofty valuation," they added.

For more such analysis, read Mark to Market.

The stock trades at about 28 times FY26 earnings estimates as per Bloomberg data. The commissioning of RE plants and the execution of EPC projects hold the key for further stock performance. While the traction in businesses across the renewable energy value chain is expected to drive company’s growth, investors would need to keep a watch on project timelines.