MOSL: TATA POWER (INITIATING COVERAGE)-Leading supplier struggling for RoE accretive growth-Initiating with Sell

​Tata Power (initiating coverage): Leading supplier struggling for RoE accretive growth; Initiating with Sell

(TPWR IN, Mkt Cap USD3.4b, CMP INR84, TP INR69, 18% Downside, Sell)

• Tata Power (TPWR) is a leading private sector power supplier, with capacity of 10,477MW (71% thermal, ~7% hydro, ~10% wind, 9% solar and 3% waste heat recovery), largely in India. It is also engaged in electricity distribution in Mumbai/Delhi, and has stakes in coal mining assets in Indonesia and certain overseas power generation assets. It has consolidated its position in renewable energy (RE) - a key driver of growth - with the acquisition of Welspun's assets.
• The company's earnings would get a boost on sharp increase in thermal coal prices and inorganic growth. However, RoE will still hover at ~11% over next three years, which is lower than its cost of equity.
• Regulated business, which earns superior RoE, has many challenges and lacks material growth. The strategic engineering division has tailwinds in the form of high growth from defense opportunity, but it contributes just 1-2% of EBITDA.
• The recent Supreme Court (SC) order has dashed the hope of compensatory tariff (CT) for CGPL Mundra, leading to losses. The declining structure of capacity charge and rising O&M costs would remain drags.