Tata Power all set to electrify its growth

Tata Power wants to boost its return ratios with higher profits. Return on Equity (RoE) and Return on Capital Employed (ROCE) are anticipated to reach higher levels by FY2027—more specifically, 13% and 11%, respectively. In FY2022, these metrics were 8.5% and 8.9%, respectively.

Tata Power’s strategy to achieve the target:

1. Clear Focus on Green Energy:

Tata Power's clear emphasis on the green business is another noteworthy aspect. 80% of the capital expenditures (Capex) of more than Rs. 1 trillion from FY22 to FY27 will go toward green businesses.

This includes increasing the installed utility-scale renewable capacity from 5.5 GW in FY2022 to 20 GW by FY2027. Additionally, the company hopes to increase revenue from solar water pumps and rooftop panels by over eight times each by FY2027.

2. Goal to achieve 2x the Distribution Network:

Separately, transmission and distribution are allocated 17% of capital expenditures. By FY2027, Tata Power wants to double the number of customers in its distribution network from 12.3 million in FY2022 to 40 million. The company believes that the Electricity Amendment Bill's passage would be a game-changer because it would open up the market for private companies to engage in power distribution.

Headwinds and Tailwinds Ahead:

The total capital employed would increase from Rs. 65600 crores in FY2022 to more than Rs. 1.6 trillion by FY2027 as a result of the overall capex addition. It is still unclear, though, whether this capex plan will cause the company's debt-to-equity ratio to worsen. By FY2027, the company anticipates that this metric will still be below 1.5 times. The ratio was 1.53 in FY2022.

Tata Power's profits are anticipated to increase in FY2023, thanks to rising coal prices around the world. Nevertheless, investors would benefit from monitoring the direction of prices in the near term.

Due to a number of factors, including the expectation of a deal at a higher valuation in its renewable energy business, higher global coal prices, and the anticipated resolution of the under-recovery at Mundra, Tata Power shares have increased significantly over the past year.