The Tata Power Company Limited - Rating outlook revised to 'Positive', Ratings Reaffirmed

CRISIL Ratings has revised its outlook on the long-term bank facilities and non convertible debentures of The Tata Power Company Limited (Tata Power) to 'Positive' from 'Stable' while reaffirming its rating at 'CRISIL AA'. The rating on Tata Power's commercial paper programme and short-term bank facilities has been reaffirmed at 'CRISIL A1+'.

The revision in outlook reflects the possibility of better-than-expected business risk profile if the improvement in operating profitability in fiscal 2024, across power generation and distribution business, sustains along with a continuing healthy financial performance with consolidated net leverage (ratio of net debt to adjusted earnings before interest, tax, depreciation and amortization--Ebitda) remaining within rating threshold.

The increase in operating profitability of Tata Power since fiscal 2023 is mainly on account of better profitability of its Mundra Ultra Mega Power Project (Mundra plant), improved efficiency in Odisha discom business and continued growth in renewable energy (RE) business with steady capacity addition. Profitability during last fiscal was also supported by higher margins in overseas coal mining business amid elevated coal prices.

Going forward, increased scale of operations, improving operating efficiency and steady cash creation in thermal generation and regulated business is expected to support strong operating cash accrual. This would be despite an expected reduction in earnings from coal mining business, amid lower coal prices this fiscal. Furthermore, increasing the level of integration in the RE business by setting up in-house module manufacturing and engineering, procurement and construction (EPC) business lends support.

Overall, CRISIL Ratings expects Tata Power's consolidated adjusted Ebitda to be more than Rs 12,000 crore each in fiscals 2024 and 2025 (was around Rs 11,500 crore in fiscal 2023 and around Rs 9,600 crore in fiscal 2022). Adjusted Ebitda was reported at Rs 6,694 crore in the first half of fiscal 2024.

The 'Positive' outlook also reflects the possibility of consolidated financial leverage (net debt to adjusted Ebitda) sustaining below the rating threshold of 3.8-4.0x (consolidated leverage has already reduced from ~ 4.5 times in fiscal 2022 to 3.8 times in fiscal 2023). CRISIL Ratings notes the company's capital expenditure (capex) plans (mainly towards RE and distribution business) over the medium term. However, CRISIL understands that addition in debt is not expected to be more than ~50% of total additional capex incurred during the year. Further, expectation of strong operating cash generation (with share of more than 80% from regulated distribution and steady generation business), is expected to sustain consolidated net leverage comfortably below 3.8-4.0x over the medium term and could result in rating upgrade.

CRISIL Ratings also notes the presence of large cash balance in Tata Power's Odisha distribution business, however, the same has not been considered for net debt computation at this point as the cash is encumbered against customer deposits. In case, the said cash is allowed by the regulator to be used by the company to meet its funding requirements in the future, it will reduce the dependence on external financing and would further improve the company's leverage and liquidity profile.

The ratings also factor in the strong financial flexibility of Tata Power, aided by being a part of the Tata group. Further, financial flexibility of Tata Power is supported by its demonstrated ability to raise strategic growth funds (raised ~ Rs 4,000 crore during fiscal 2023 by selling stake of ~ 10% in RE business). The same provides support towards achieving the targeted capex plans while keeping leverage levels within the rating threshold.

Overall, CRISIL Ratings expects healthy margins from Tata Power's regulated and stable business to improve further on account of increase in growth capex, leading to healthy cashflows to support debt for the said capex along with sustenance of consolidated net leverage. Same shall be key monitorables also.

CRISIL Ratings has withdrawn its ratings on Rs 36 crore of non-convertible debentures as the same were redeemed. The withdrawal is in line with CRISIL Ratings' withdrawal policy (See Annexure 'Details of rating withdrawn' for details). CRISIL Ratings has received independent confirmation and other relevant documents that these instruments are fully redeemed.

Shares of Tata Power Company Limited was last trading in BSE at Rs. 260.75 as compared to the previous close of Rs. 262.55. The total number of shares traded during the day was 294322 in over 5166 trades.

The stock hit an intraday high of Rs. 264.50 and intraday low of 260.15. The net turnover during the day was Rs. 77030577.00.

Source : Equity Bulls

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