What’s Driving Analysts To Downgrade Rating On This Tata Group Multibagger Stock?

Tata Power has approved a signatory contract with BlackRock Real Assets and Mubadala, the Blackrock group will invest Rs 4,000 crore (US$ 525 million) in equity and compulsorily convertible instruments for a 10.53 percent stake in Tata Power Renewable Energy Ltd. The agreement values Tata Power's renewable business at Rs 34,000 crore in equity, and despite the deal, Tata Power's shares have dropped below 5% in today's closing session. Tata Power shares have continued to fall more than 14 percent in the previous five trading days. On the 19th of April 2022, the stock fell -13.70 (-5.31 percent) and closed at Rs 244 on the NSE. Despite the declining price, Tata Power Company Ltd. is trading higher than the 50-day, 100-day, and 200-day moving averages but lower than the 5-day and 20-day moving averages. Despite the price downturn, the stock has risen from Rs 93 to Rs 244 in a year, representing a multibagger return of 160.90 percent, and the stock has risen 9.31 percent year to date (YTD).

On Monday, the brokerage firm ICICI Securities has downgraded the rating with "HOLD" for the shares of Tata Power and has said in a report that "Tata Power (TPWR) has concluded the long-awaited divestment of stake in its renewables (RE) businesses. It has consolidated all its RE businesses under one holdco - TPREL - and will be raising Rs40bn by offloading 10.53% stake in the same to GreenForest New Energies Bidco Limited (UK), a consortium of BlackRock and Mubadala, all of which will be used as growth capital for TPREL. As per our calculations, the transaction will be at an EV of ~Rs520bn-530bn, with pre-money equity valuation of Rs340bn. As per our estimates, the RE business has been valued at ~12x EV/EBITDA on full capacity commissioned basis (average of our FY23E/FY24E estimates)."

"Though, it is higher than the valuation normally ascribed to a renewable company that listed recently through IPO, we believe, at CMP, the deal is priced-in. Yet we believe the long-term potential of TPWR's businesses is high as it is best placed to participate in RE capacity addition programme of GoI and any discom privatisation. We reinitiate our coverage on TPWR with a HOLD rating and a target price of Rs262. Mundra resolution and RE tendering & ordering pick-up are key near-term drivers," the brokerage has further added.

ICICI Securities has claimed that "We reinitiate our coverage on TPWR with a HOLD rating and a target price of Rs262. The stock is currently trading at FY24E P/E of 29.6x and P/B of 3.3x. At fully commissioned RE capacity, the deal is valued at ~12x EV/EBITDA (average of FY23E/FY24E EBITDA, assuming full commissioned capacity over the next two years), which we believe, at CMP, is priced-in. Yet we believe the long-term potential of the company's businesses are high and TPWR is the best-placed private player in the power sector, with businesses across the value chain. We recommend entering the stock at a lower price vs CMP of Rs273/sh. Mundra resolution and RE tendering and ordering pick-up are the key near-term drivers."

Delay in deal closure and divestment of capital receipts, delay in RE auctions and orders, higher than expected demand in the distribution areas and lower than expected loss at CGPL are the key risks for the stock as per the brokerage.

Another brokerage company HDFC Securities has said in a report that "A consortium led by BlackRock Real Assets shall invest INR40bn (in two tranches over a period of next eight months) for a 10.53% stake in Tata Power Renewables by way of equity/compulsorily convertible instruments. The investment would translate into a base equity valuation of INR340bn and an enterprise value of ~INR500bn for a platform that will house all renewable energy businesses of Tata Power."

HDFC Securities has also said that "While the deal is better than the earlier monetisation plan through InvIT (which was likely to be valued at ~8x FY23 EV/EBITDA), it is below our expected equity value of ~INR45bn for the entire renewable portfolio. Accordingly, we have cut our SoTP target price to INR231, from INR277, by assigning the implied equity value to its renewable portfolio, as per the proposed deal. Eventually, we downgrade our rating on TPWR to SELL from REDUCE earlier."

The brokerage claims that "While the fund raise of INR40bn will be used to fund future Capex for renewable portfolio, the deal valuation is below our expectation. We had assumed an equity value of ~INR450bn for TPWR's entire RES portfolio, but the same is executed at base valuation of INR340- INR380bn. Accordingly, we have revised our SoTP TP downward to INR231 from INR277/share by assigning the deal implied multiple to TPREL business. Hence, we now downgrade our rating on TPWR to SELL from REDUCE."

Disclaimer

The above recommendations are from different broking companies and Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.