TATA POWER CO Tata Power 2.0: Realigning Business and Perception E India Equity Research| Power

COMPANY UPDATE

TATA POWER CO Tata Power 2.0: Realigning business and perception e India Equity Research| Power

Tata Power (TPCL) today unveiled its long-term (FY25) business strategy EDELWEISS 4D RATINGS focusing on: a) Disentangling business operations (from 95 to 40 entities). Absolute Rating BUY b) Prudent capital allocation. c) Balance sheet heft–sustainable D/E of 1.5x and debt/EBITDA of 3.5x. d) Propelling revenue 2x and profit 3x. Rating Relative to Sector Performer Risk Rating Relative to Sector Medium Moreover, leveraging its brand value, the company is eyeing consumer- Sector Relative to Market Underweight oriented businesses and planning to transition from a B2G to B2C enterprise (Going Green) as it accentuates offerings in solar rooftop, solar pumps, EC charging, Microgrids, among others. In our view, TPCL’s MARKET DATA (R: TTPW.BO, B: TPWR IN) significant business restructuring plan (including deleveraging) along with CMP : INR 57 rejig of its growth model is likely to have overarching implications from Target Price : INR 75 financial and ESG perspective–gradual re-rating will continue and the 52-week range (INR) : 69 / 27 perception will change to growth orientation. We revise up FY22E EPS by Share in issue (mn) : 2,704.8 10% and SOTP by 25% as we factor deleveraging and restructuring M cap (INR bn/USD mn) : 153 / 2,046 Avg. Daily Vol.BSE/NSE(‘000) : 9,444.5 benefits. Maintain ‘BUY’ with revised TP of INR75 (earlier INR60).

SHARE HOLDING PATTERN (%) Changing perception: From restructuring to growth orientation Current Q4FY20 Q3FY20 TPCL unveiled “Tata Power 2.0 – the story of change”, delineating its next five years’ Promoters * 46.9 37.2 36.2 growth strategy (refer table 1). The company has identified five key focus areas: a) MF's, FI's & BK’s 26.6 27.8 26.7 Solving legacy issues (deleveraging, Mundra resolution). b) Securing financial fitness. c) FII's 10.9 18.6 21.0 Growth orientation. d) Sustainability. e) Creating shareholder value. With higher Others 15.6 16.3 16.1 probability of a successful renewable InvIT, we believe the narrative will gradually shift * Promoters pledged shares : 2.5 to TPCL being a growth-oriented company (refer, FY21 beckons turnaround). (% of share in issue)

3x PAT envisaged; renewable, T&D and new businesses in focus PRICE PERFORMANCE (%) EW Power Management’s FY25 target is to double revenue to ~INR600bn, triple profit to INR36bn Stock Nifty Index and 550bps accretion in RoE to 12% plus. To achieve this, management is training focus on new growth avenues which are less capital intensive, and are also gaining traction– 1 month 16.3 2.7 (4.9) solar EPC & pumps, T&D and renewable businesses. In our view, of the INR24bn 3 months 75.4 10.5 2.5 incremental PAT, INR18bn is from T&D/renewable and balance from new businesses. 12 months 1.8 (1.0) (21.2)

Outlook and valuation: Turning investor friendly; maintain ‘BUY’

TPCL’s strategic intent—business restructuring and deleveraging—has started to crystalise and it will go a long way in enhancing investor confidence, in our view. Despite having run up 100% over the past three months, we remain constructive on the stock. We raise TP by INR15/share— INR7 on interest cost benefits, INR6 on CGPL tax synergies, and INR2 value assigned to CESU/Prayagraj. We maintain ‘BUY/SP’. Financials (INR mn) Swarnim Maheshwari

FY19 FY20 FY21E FY22E +91 22 4040 7418 RetainYear to “BUY March’. Revenues 298,811 291,364 325,239 341,885 [email protected]

EBITDA 67,451 79,428 75,208 80,284 Ashutosh Mehta

Adjusted Profit 7,362 12,014 11,001 15,854 +91 22 6141 2748 [email protected] Adjusted diluted EPS (INR) 2.7 4.4 3.4 5.0

Price/BV (x) 0.8 0.8 0.8 0.7 ROAE (%) 5.1 7.1 5.3 6.8 August 19, 2020

Edelweiss Research is also available on www.edelresearch.com, Edelweiss Securities Limited Bloomberg EDEL , Thomson First Call, Reuters and Factset.

Power

Table 1 : Segment wise opportunity and target over the next five years (without eliminations) Segment Unit FY20 FY25E Key drivers 1. Renewables INR bn 42.8 220.0 Capacity GW 4.2 15.0 Annual ordering - FY21-22 (10-15GW) and FY23-25 (15-20 GW). Capacities expected from Central agencies like SECI/NTPC and select state bids a) EPC Utility Revenue INR bn 15 120 Maintain a 20% m/s in 15-20GW annual market. Share of third party EPC projects - 60%, balance 40% self EPC Avg project size increasing from 50-100 MW to 200-300MW b) Rooftop solar Cumulative installation GW 4 20 Rooftop capacity MW 103 1,166 Growth to be driven by expansion in cities via channel partners Rooftop Market share % 5 33 c) Solar pumps Off grid market size INR bn 30 190 On grid market size INR bn 0 130 Solar pumps annual No's 91,000 1,138,000 Cost leadership, operational & collection efficiencies, after market Tata Power annual pumps No's 0 185,000 Tata Power m/s % 0 16 Revenue of rooftop and solar INR bn 6.9 100.0 combined

2. Transmission & Distribution INR bn 119.7 270.0 a) Distribution INR bn 111.9 250.0 Customer base (TPCL) Mn 2.6 20.0 Annual opportunity (avg) INR bn 5,000 NTP recommends privatization, open access, timely cost reflective tariff revisions, extensive metering, etc. Draft Electricity Amendment Bill & National Tariff Policy – Important to of which T&D (annual) INR bn 1,250 kick start investment cycle of which TBCB (annual) INR bn 96 Need for high capacity transmission corridors and dedicated corridors for Renewable Energy AT&C losses % 19.1 10.0 Private participation through PPP & DF in States and Union Territories ACS-ARR gap INR p.u 0.4 0.0 Bring down subsidies - Direct benefit transfer Smart metering % ~5 100.0 Improve efficiency of discoms – penalty for non-performance Private sector share % < 6 States & UT considering privatisation (> 36mn customers) - Odisha (4.8mn), UP (8.2mn), MP (10.2mn), Raj (8.4mn), Jharkhand (1.4mn), b) T&D service revenue INR bn 0.8 10.0 Union Territories (> 3mn)

c) Microgrids INR bn 0.0 6.0 3. New business INR bn 0.0 35.0 a) Electric Vehicles Vehicles on road Mn 12.5-17.5 Comprehensive government policy framework to drive growth in EV segment TPCL EV charging points No's 170 > 100,000 Government has approved installation of 2600 EV charging station in 62 cities under FAME-2. TPCL presence in cities No's 20 100 b) Home Automation Market size INR bn 126 800 Rapid adoption of digitalisation and technology, given improved lifestyle and lower cost of connectivity 4. Thermal and Hydro TPCL revenues INR bn 120 130 Thermal no more a growth engine. Focus on improving operational efficiencies. Source: Company, Edelweiss research

2 Edelweiss Securities Limited Tata Power Co

Chart 1: FY25 target – doubling of revenues (business by business split) 650 12 Distribution - INR 135bn 34 595 Microgrid - INR 6bn 120 520 T&D Service - INR 9bn 140 390 289 Rooftop & Solar

(INR bn) (INR 260 pumps - INR 90bn EPC - INR 30bn 130

T&D

New

Others

energy

FY20 FY25

Revenues Revenues

Renewables

Turning off thermal Chart 2: Tripling of PAT to be majorly led by T&D and renewables 40.0 and hydro growth Distribution - INR 8bn 2 36 4 engine, TPCL is now Microgrid - INR 1.2bn 7 focused on 32.0 T&D Service - INR 1.8bn Renewable, T&D and 11 new energy 24.0 businesses (INR bn) (INR 16.0 12 Rooftop & Solar pumps- INR5.5-6bn 8.0 EPC - INR 1-1.5bn

0.0

T&D

PAT PAT

FY20 FY25

Others Consumer Renewable Note 1) Segment wise PAT target is our estimates; 2) Renewable numbers are post eliminations

Chart 3: Improving return ratio’s… Chart 4: …and balance sheet matrix 6.0 15.0 > 12.0 > 12.0 4.7 12.0 4.8

9.0 7.9 3.6 < 3.5 (%) (%) 5.6 6.0 2.4 2.2

< 1.5 3.0 1.2

0.0 0.0 RoE RoCE FY20 FY25 FY20 FY25 Net Debt/Equity Net Debt/EBITDA

Source: Company, Edelweiss research

3 Edelweiss Securities Limited Power

Chart 5: Regulated equity to jump by INR 60bn to INR 135bn over FY25 Regulated Equity - FY20 Regulated Equity - FY25

Distribution , Generation, INR 24.7bn INR 42.0bn Distribution, Generation, INR 60.0bn INR 37.7bn

Transmissio Transmissio n, INR n, INR 15.7bn 33.0bn

Chart 6: Shift in capital allocation : Thermal & Hydro no more a growth engine Capital allocation FY20 Capital allocation FY25 Customer Service Renewable CGPL & Business CGPL & 29% Coal 17% 2% Coal Renewable 39% 32%

Reg Thermal & Hydro Reg Reg T&D 18% Thermal & 18% Reg T&D Hydro 31% 14% Source: Company, Edelweiss research

Table 2: SoTP valuation (Post dilution) Equity/ Valuation Tata Tata Share Per share Businesses Method RoE CoE Multiple Reserves (INR mn) Share (%) (INR mn) (INR) Regulated biz P/B 44,801 17.0% 12.0% 1.5 69,150 100 69,150 22 Delhi Distribution P/B 15,410 17.0% 12.0% 1.5 23,785 51 12,130 4 Other business (Maithon, P/B 36,083 18.0% 12.0% 1.7 59,616 74 44,116 14 IEL, Power links etc) Renewable business EV/EBITDA 120,354 6.5 24,295 100 37,562 12 Mundra UMPP NPV at COE of 14% (23,442) 100 (23,442) (7) KPC & Bumi NPV at WACC of 8% 167,321 30 50,196 16 Prayagraj NPV at COE of 13% 8,859 26 2,303 1 Restructuring benefits NPV of tax synergies 19,277 100 19,277 6 Cash & Investments FY20 27,937 1.0 27,937 100 27,937 9 Total 217,650 75 Source: Company, Edelweiss research

4 Edelweiss Securities Limited Tata Power Co

Company Description Tata Power is India’s largest integrated power company with a significant international presence. The Company has an installed generation capacity of 10,750 MW in India and a presence in all the segments of power sector, viz Fuel & Logistics, Generation (thermal, hydro, solar and wind), Transmission, Distribution and Trading. It has successful public- private partnerships in Generation, Transmission and Distribution in India namely “Tata Power Delhi Distribution Limited” with Delhi Government for distribution in North Delhi, ‘Powerlinks Transmission Ltd.’ with Power Grid Corporation of India Ltd. for evacuation of Power from Tala hydro plant in Bhutan to Delhi and ‘Maithon Power Ltd.’ with Damodar Valley Corporation for a 1050 MW Mega Power Project at Jharkhand. It is one of the largest renewable energy players (2.6GW operational capacity) in India and has developed the country’s first 4000 MW Ultra Mega Power Project at Mundra (Gujarat) based on super- critical technology. Tata Power has signed a Distribution Franchisee Agreement (DFA) with Ajmer Vidyut Vitran Nigam Limited (AVVNL) and formed a Special Purpose Vehicle (SPV) “TP Ajmer Distribution Limited” (TPADL), to cater to the power requirements of customers in Ajmer for a period of 20 years. Its international presence includes strategic investments in Indonesia through 30% stake in the leading coal company PT Kaltim Prima Coal (KPC) in Singapore through Trust Energy Resources to securitise coal supply and the shipping of coal for its thermal power generation operations and in Bhutan through a hydro project in partnership with The Royal Government of Bhutan. The company has further created a SPV platform ‘Resurgent’ with a 26% stake and has acquired 1980MW Prayagraj Power plant.

Investment Theme Tata Power business models is decoupled— minimal demand/volume risks as more than 80% of the PAT is attributable to the core regulated business. Thus core earnings are resilient enough even during demand decline.

Management’s plan to prune D/E from ~2.3x to 1.5.x instills confidence. Advanced divestment pipeline is INR40-55bn (Equity) is likely to gain momentum over the next 6-12M which could reduce the D/E to less than 1.5x.

We perceive a couple of potential triggers (like Mundra resolution, renewable InvIT, CESU acquisition etc.) in the stock which could play out over the next 12-15 months.

Key Risks Swing in international coal prices could impact our earnings estimate significantly.

Delay in simplification of the business structure.

5 Edelweiss Securities Limited Power

Financial Statements(Consolidated) Key Assumptions Income statement (INR mn) Year to March FY19 FY20 FY21E FY22E Year to March FY19 FY20 FY21E FY22E Macro Income from operations 298,811 291,364 325,239 341,885 GDP(Y-o-Y %) 6.1 4.8 (4.0) 7.0 Direct costs 179,996 161,429 197,880 207,206 Inflation (Avg) 3.4 4.3 3.5 4.0 Employee costs 13,391 14,406 15,286 15,727 Repo rate (exit rate) 6.3 4.4 3.0 4.0 Other Expenses 37,973 36,101 36,865 38,668 USD/INR (Avg) 70.0 70.7 75.0 73.0 Total operating expenses 231,359 211,936 250,031 261,601 Company EBITDA 67,451 79,428 75,208 80,284 Mundra units sale (MUs) 29,328 29,328 29,328 29,328 Depreciation 23,931 26,336 28,626 29,872 BUMI coal sales (MT) 58.5 59.0 58.0 59.0 EBIT 43,520 53,092 46,582 50,412 Consol Reg. Eqty (INRmn) 78,882 80,670 82,516 84,361 Less: Interest Expense 41,700 44,937 43,877 43,180 Add: Other income 3,862 5,626 5,519 5,619 Profit Before Tax 24,173 14,156 8,224 12,852 Less: Provision for Tax 10,876 6,415 2,786 2,810 Add: Exceptional items 18,491 375 - - Minority interest 2,495 2,991 1,752 2,185 Associate profit share 14,018 9,526 7,315 7,998 Reported Profit 24,820 14,276 11,001 15,854 Exceptional Items 17,458 2,262 - - Adjusted Profit 7,362 12,014 11,001 15,854 Shares o /s (mn) 2,705 2,705 3,195 3,195 Adjusted Basic EPS 2.7 4.4 3.4 5.0 Diluted shares o/s (mn) 2,705 2,705 3,195 3,195 Adjusted Diluted EPS 2.7 4.4 3.4 5.0 Adjusted Cash EPS 13.7 14.7 12.4 14.3 Dividend per share (DPS) 1.3 1.5 1.5 1.5 Dividend Payout Ratio(%) 16.2 32.4 43.6 30.2

Common size metrics Year to March FY19 FY20 FY21E FY22E Operating expenses 77.4 72.7 76.9 76.5 Depreciation 8.0 9.0 8.8 8.7 Interest Expense 14.0 15.4 13.5 12.6 EBITDA margins 22.6 27.3 23.1 23.5 Net Profit margins 3.3 5.1 3.9 5.3

Growth ratios (%) Year to March FY19 FY20 FY21E FY22E Revenues 11.3 (2.5) 11.6 5.1 EBITDA 7.5 17.8 (5.3) 6.7 PBT 87.3 (41.4) (41.9) 56.3 Adjusted Profit (53.4) 63.2 (8.4) 44.1 EPS (53.4) 63.2 (22.5) 44.1

6 Edelweiss Securities Limited Tata Power Co

Balance sheet (INR mn) Cash flow metrics As on 31st March FY19 FY20 FY21E FY22E Year to March FY19 FY20 FY21E FY22E Share capital 2,705 2,705 3,195 3,195 Operating cash flow 45,738 73,753 87,067 78,924 Reserves & Surplus 180,350 192,955 229,673 240,734 Financing cash flow (51,845) (51,095) (63,767) (47,773) Shareholders' funds 183,055 195,660 232,869 243,930 Investing cash flow (3,192) (5,429) (8,716) (32,248) Minority Interest 21,667 23,320 25,072 27,258 Net cash Flow (9,299) 17,229 14,584 (1,097) Long term borrowings 311,392 326,951 283,485 281,269 Capex (35,333) (21,894) (38,885) (37,500) Short term borrowings 138,754 118,444 120,812 123,229 Dividend paid (4,010) (4,626) (4,793) (4,793) Total Borrowings 450,146 445,395 404,298 404,498

Long Term Liabilities 29,212 63,970 63,970 63,970 Profitability and efficiency ratios Def. Tax Liability (net) 9,673 10,998 10,998 10,998 Year to March FY19 FY20 FY21E FY22E Sources of funds 693,753 739,343 737,206 750,653 ROAE (%) 5.1 7.1 5.3 6.8 Gross Block 579,572 641,519 676,519 714,019 ROACE (%) 7.2 8.9 7.9 8.4 Net Block 411,015 446,626 453,000 460,629 Inventory Days 34 39 35 37 Capital work in progress 25,757 16,115 20,000 20,000 Debtors Days 44 56 50 49 Intangible Assets 32,034 30,038 30,038 30,038 Payable Days 112 120 102 108 Total Fixed Assets 468,806 492,779 503,038 510,666 Cash Conversion Cycle (35) (25) (17) (22) Non current investments 133,749 138,353 118,353 118,353 Current Ratio 1.7 1.7 1.7 1.7 Cash and Equivalents 9,544 27,937 42,871 42,141 Gross Debt/EBITDA 6.7 5.6 5.4 5.0 Inventories 17,064 17,524 20,551 21,501 Gross Debt/Equity 2.2 2.0 1.6 1.5 Sundry Debtors 44,453 44,259 44,553 46,834 Adjusted Debt/Equity 2.2 2.0 1.6 1.5 Loans & Advances 15,326 27,575 29,693 30,690 Interest Coverage Ratio 1.0 1.2 1.1 1.2 Other Current Assets 141,868 137,687 133,599 143,462

Current Assets (ex cash) 218,710 227,045 228,396 242,487 Operating ratios Trade payable 54,815 50,954 59,635 62,446 Year to March FY19 FY20 FY21E FY22E Other Current Liab 82,242 95,816 95,816 100,549 Total Asset Turnover 0.4 0.4 0.4 0.5 Total Current Liab 137,057 146,771 155,451 162,995 Fixed Asset Turnover 0.7 0.6 0.7 0.7 Net Curr Assets-ex cash 81,653 80,274 72,944 79,492 Equity Turnover 1.5 1.4 1.4 1.3 Uses of funds 693,753 739,343 737,206 750,653

BVPS (INR) 67.7 72.3 72.9 76.3 Valuation parameters Year to March FY19 FY20 FY21E FY22E

Free cash flow (INR mn) Adj. Diluted EPS (INR) 2.7 4.4 3.4 5.0 Year to March FY19 FY20 FY21E FY22E Y-o-Y growth (%) (53.4) 63.2 (22.5) 44.1 Reported Profit 24,820 14,276 11,001 15,854 Adjusted Cash EPS (INR) 13.7 14.7 12.4 14.3 Add: Depreciation 23,931 26,336 28,626 29,872 Diluted P/E (x) 20.8 12.8 16.5 11.4 Interest (Net of Tax) 41,700 24,020 29,013 33,738 P/B (x) 0.8 0.8 0.8 0.7 Deferred tax 5,689 1,325 - - EV / Sales (x) 2.1 2.0 1.7 1.7 Others (71,677) 6,418 11,097 6,008 EV / EBITDA (x) 9.1 7.5 7.5 7.1 Less: Changes in WC 21,274 1,379 7,330 (6,548) Dividend Yield (%) 2.3 2.6 2.6 2.6

Operating cash flow 45,738 73,753 87,067 78,924 Less: Capex 35,333 21,894 38,885 37,500 Free Cash Flow 10,405 51,859 48,182 41,424

Peer comparison valuation Market cap EV / EBITDA (X) P/B (X) ROAE (%) Name (USD mn) FY21E FY22E FY21E FY22E FY21E FY22E Tata Power Co 2,046 7.5 7.1 0.8 0.7 5.3 6.8 CESC 1,009 5.8 5.1 0.8 0.7 11.8 12.4 NTPC 12,487 8.4 7.3 0.8 0.7 11.3 12.8 Median - 7.5 7.1 0.8 0.7 11.3 12.4 AVERAGE - 7.3 6.5 0.8 0.7 9.5 10.7 Source: Edelweiss research

7 Edelweiss Securities Limited Power

Additional Data Directors Data Mr. N. Chandrasekaran Chairman, Non-Independent, Non-Executive Mr Praveer Sinha CEO and Managing Director Ms Anjali Bansal Independent, Non-Executive Mr N H Mirza Independent, Non-Executive Mr D M Satwalekar Independent, Non-Executive Miss Vibha Padalkar Independent, Non-Executive Mr S. V. Bhandarkar Independent, Non-Executive Mr. K. M. Chandrasekhar Independent, Non-Executive Mr Ashok Sinha Independent, Non-Executive Ms. Saurabh Agarwal Non-Executive Mr. Banmali Agarwala Non-Executive

Auditors - M/s S R B C & CO. LLP *as per last annual report

Holding – Top10 Perc. Holding Perc. Holding Tata sons ltd 35.27 Icici prudential ass 8.07 Matthews intl capita 7.29 Life insurance corp 6.34 First state investme 3.51 New india assurance 1.93 Reliance capital tru 1.85 General insurance co 1.73 Franklin resources 1.56 Tata steel ltd 1.45

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*in last one year

8 Edelweiss Securities Limited RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk Adani Power REDUCE SU H CESC BUY None None India Grid Trust BUY SP M Indian Energy Exchange BUY SO M JSW Energy HOLD SP M NTPC BUY SO L Power Grid Corp of India BUY SO L PTC India BUY None None Tata Power Co BUY SP M

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

9 Edelweiss Securities Limited Power

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain

Head of Research [email protected]

Coverage group(s) of stocks by primary analyst(s): Power Adani Power, Adani Transmission, CESC, Indian Energy Exchange, India Grid Trust, JSW Energy, NTPC, PTC India, Power Grid Corp of India, Tata Power Co

Recent Research

Date Company Title Price (INR) Recos

30 -Dec-99 NTPC Accelerated commercialisation 95 Buy on cards; Result Update 30-Dec-99 Power July-20: Inching closer to equilibrium; Sector Update 30-Dec-99 Tata Power Making it simple and more 53 Buy investible; Result Update

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn 743 Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11 594

One year price chart 446 70

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10 Edelweiss Securities Limited

Tata Power Co

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11 Edelweiss Securities Limited

Power

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12 Edelweiss Securities Limited

Tata Power Co

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13 Edelweiss Securities Limited