Tata Power Shares may Drop 45% in 12 Months: Goldman Sachs Predicts

Tata Power shares fell over three% in early trade on May 9, after the Tata group firm posted a consolidated net profit of ₹1,045.59 crore for the fourth quarter. However, global brokerage firm Goldman Sachs said it expects the stock to fall as much as 45% over the next 12 months. At 10.05 am, Tata Power shares were quoting at ₹425.3 apiece on the NSE, down by 2.4% from the previous session's close.

The firm's net profit grew 11.37% from the year-ago period driven by strong performance of its core thermal coal generation business. However, the thermal generation (including coal) cluster saw a sharp 58% year-on-year drop in PAT, primarily on account of losses of ₹43 crore, said Kotak Institutional Equities.

Over the past year, Tata Power shares gained over 100%, more than doubling investors' wealth. In comparison, the frontline Nifty 50 index gained around 22% during the same time period.

Goldman Sachs has a 'Sell' rating on the Tata Power stock and a price target of ₹240 per share, suggesting a potential downside of 45% from the stock's closing level on Wednesday. The price target is also a lot lower than the consensus estimate on the Street.

Goldman Sachs believes that the risk-reward ratio offered by shares of Tata Power at its current market price is "unfavourable". The stock has gained 75% in the last six months and more than 110% over the last 12 months.

Tata Power shares are trading at about 35 times the estimated earnings for the financial year ending March 2026 estimates, a lot higher than the historical price-to-earnings ratio, as per the report.

Another broking firm CLSA also has a 'Sell' recommendation on Tata Power, with a target price of ₹297 per share. CLSA said the stock remains expensive at 35 times its earnings estimate for FY25. The brokerage said the company's weak March quarter earnings were led by net long coal position and weak renewable energy independent power producers (IPP) profitability. The NFE business was a mixed bag.

The Tata group firm reported a 11% year-on-year (YoY) jump in profit after tax (PAT) at ₹1,046 crore for the March quarter as against ₹939 crore in the same quarter last year. The company’s revenue rose 27% to ₹15,846.50 crore in the quarter ending March 31. EBITDA or Earnings before interest, taxes, depreciation, and amortisation surged 8% to ₹3,358 crore from ₹3,101 crore in Q4FY23.

"All our businesses have done well. Our generation plants have done well, our transmission and distribution businesses have done well. So, all of them have performed to their full capacity. That's why our revenue has increased (in the quarter)," said Tata Power CEO and Managing Director Praveer Sinha in a post earnings call.

"Similarly, our operations have improved and they have contributed towards profit of the company," Sinha added.

Power demand in India continues to surge and witnessed an 8%  growth in FY24 on an annual basis. Tata Power management believes this trend to continue at least for the next 2-3 years. The coal prices remained stable for last 6-8 months and are likely to remain stable going forward.

Out of the 21 analysts that have coverage on Tata Power, eight of them have a 'Buy' rating, three have a 'Hold call, while 10 of them have a 'Sell' recommendation. Consensus among analysts suggests the stock to drop 20% from current levels.