Tata Power: Charged up

Shares of power distribution companies such as Tata Power, charged ahead in an otherwise weak market, surging up to 9%, on the BSE on Thursday after the Cabinet Committee on Economic Affairs (CCEA) on Wednesday relaxed the borrowing limits for the state government-owned power distribution companies (discoms) as a one-time measure.
Currently, discoms can borrow only up to 25% of their previous year’s working capital under the limits stipulated in the UDAY scheme. Borrowing were tied to discoms’ operational performance to ensure discipline. The limit, however, has now been relaxed for a one-time lending. This would help those discoms that have exhausted their borrowing limits and will assist power retailers to clear their dues to generation and transmission companies to help reduce stress in the sector.

Tata Power is also expected to benefit from the divestment-related measures (part receipt from International Shipping business, Arutmin, and Tata SED). Further, the infusion of Rs 2600 crore from promoters would continue to aid debt reduction.
The approval of a tariff hike at Mundra, the merger of CGPL & Tata Power Solar with TPWR, and favorable InvIT valuations would provide upsides to our estimates.

Tata Power is sitting on a debt of over Rs 43,000 crore. The Tata group company is eyeing Rs 9,000 crore revenues from its renewable energy operations by FY2025. It plans to launch the infrastructure investment trust (InvIT) this fiscal, post which it will explore merger and acquisition opportunities, considering the fragmented nature of the sector and the potential assets available.

For organic growth, the company is eyeing the demand pipeline and expected capacity addition through bids from central agencies like SECI and NTPC and select state bids which have good payment track record.
Aggressive growth targets and progress on deleveraging thus far (sold assets of
Rs 2400 crore + Rs 2600 crore from Tata Sons) should offer the stock price a floor.

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