Tata Power Rating: Buy; Primed for sustainable and clean growth

The realignment of its growth model will top the sustainability index, which is more crucial in our view.

We hosted Dr. Praveer Sinha, MD & CEO, Tata Power (TPCL), at the Edelweiss ESG CXO e-Series. Key highlights: (i) Tata Power 2.0 is a mega transformation from legacy to new businesses to achieve decarbonisation by investing in sunrise businesses–renewables, EV, micro grids, etc; (ii) social pillar target to double gender diversity ratio to 18% by 2025; (iii) robust governance structure in place with best-in-class practices; (iv) identified eight areas to improve its ESG rating.

The realignment of its growth model will top the sustainability index, which is more crucial in our view. TPCL is primed for sustainable (23% EPS CAGR) and clean growth. Retain Buy with revised TP of `120 (earlier `95).
Bringing ESG to core of business strategy; environment key focus

In its Tata Power 2.0 business plan, TPCL has realigned the business model to new ESG trends, which are niche as well as scalable, to harness growth. The company is focusing especially on the environmental pillar and has taken a few bold decisions in this regard: (i) No coal-based expansion/capex; (ii) expanding renewable footprint (80% by 2030) through utility and distributed solar projects and through EVs. It is confident of achieving carbon neutrality much before 2050 and aspires to become a global leader on Utility Sustainability practices. TPCL has a clear roadmap to achieve zero landfill and water neutrality by 2026.

Social and governance scorecard: Best in class
TPCL’s social quotient has been strong over the past few decades and it is spending 20% higher than its CSR obligations. Core focus areas are: (i) Education– coverage of 60% HHs to public schemes; (ii) Employability– to benefit 0.4mn youth through employment overall; (iii) Empowerment–build capacities of 25,000 SHGs; (iv) Affirmative action focus for SC, ST, differently abled for 30% with total outreach; (v) To improve gender diversity ratio to 18% by 2025. At its core, TPCL already has strong governance policies in place.

Outlook: Sunrise powering growth
TPCL has huge scope and opportunities to improve its current ESG rating (MSCI-BB) and has identified eight focus areas (renewable footprint, carbon emission, resource availability, waste management, bio diversity, etc.). Further, it targets to enter Dow Jones Sustainability Index Emerging Market List by FY25.

We firmly believe that TPCL is primed for sustainable and clean growth. We forecast sunrise business PAT mix at 35–40% by FY23. We are raising the TP to `120 as we: (i) roll forward to September 2022e; (ii) assign higher valuation to renewable EPC (12x P/E vs 8x earlier); (iii) assign higher valuation to distribution business factoring in new opportunities (2x P/Bv vs 1.5x earlier); and (iv) incorporate Tata Projects in SOTP. Renewable InvIT delay and higher AT&C losses are a few key risks. We maintain ‘BUY/SO’ and top pick status.