BUSINESS

Tata Power goes all in on

renewables
The company plans to cut back on
thermal power and put renewable
energy at the front and centre of its
plans. Will the bet pay off?

Aakriti Bhalla Delhi

29 November, 2022

Unlocked story

P
raveer Sinha, chief executive and
managing director of Tata Power,
has given one of India’s biggest
power companies a makeover. 

Ever since he took the reins in March 2018,

the power generation arm of the Tata group
has reorganized its thermal power
business, is in the process of divesting dead
investments and has been steadily reducing
its debt. 

Tata Power’s revenue has grown over 60%

in the past four years to about Rs 44,000
crore in 2021-22. Its net debt-to-EBITDA
ratio stood at 3.5 in the September quarter
of the current fiscal year as against over 7
in 2017-18 (the ratio measures a company’s
ability to pay off its liabilities).

Investors seem to have bought into Sinha’s

vision. Tata Power’s stock has jumped
225% since 2018. The company has
outperformed most of its peers, such as
Torrent Power and NTPC, and even the
benchmark S&P BSE Utilities index, except
for Adani Green Energy, which has seen its
stock jump over 6,000% since it listed in
2018. In April this year, before Tata Power
announced New York-based BlackRock’s Rs
4,000 crore investment in its renewables
business, its stock touched a record high of
Rs 298.

As if on cue, the company is now looking at

the next phase of expansion. Sinha has
reoriented the strategy towards renewables
and wants to position the firm as a “utility
of the future”. To this end, Tata Power has
plans to merge all its renewables
subsidiaries into one business. It aims to
increase its clean power generation
capacity by 3.6x over the next eight years,
even as it cuts back on thermal power
capacity.

But there are concerns. Renewable energy

stocks at large have taken a hit in the past
18 months, say analysts, with commodity
prices rising and prices of solar equipment
peaking. In line with the trend, Tata Power
has also seen its stock fall to about Rs 220.

“The stock has done exceptionally well

over the last two, two and a half years. It
has gone up from Rs 50-60 to Rs 270-
280,” says Anuj Upadhyay, a research
analyst at HDFC Securities. The only reason
the stock corrected is that the market had
built in a higher valuation multiple during
the fundraising from BlackRock, he adds.

While that may be true, the correction has

come at a time when the company stares at
a bigger question: As Sinha’s five-year
tenure nears its end, can Tata Power pull
off its plans to make it big in the
renewables sector, especially in solar
power, where continued dependence on
China for imports could affect the firm’s
order book?

Not just that. The company faces stiff

competition in the fast-growing segment
from the likes of the Adani group, Reliance
Industries and NTPC. While the shift
towards renewables is inevitable, it
remains to be seen how quickly and
efficiently it adapts to uncertainties. 

“The company has not goofed up in any

way, but [we] will have to see how it
delivers on its promises,” says a research
analyst tracking the sector, asking not to be
named. “Market participants are seeing
high growth in renewables. You see, it’s
cyclical. We saw this on the tech side too.
Everybody is trying to catch the next
Amazon of renewables. But renewables is
an entirely new model and we will have to
see how it pans out.” 

Questions sent to Tata Power remain

unanswered.

Given the uncertainties and growing

competition, how can the company set
itself apart? 

“They have an integrated business model—

combining manufacturing, [engineering,
procurement and construction] and
investment in projects. There are not too
many companies that do that. This is a
major advantage as it gives them more
control over supply chain, execution
quality and costs.” says Vinay Rustagi,
managing director of energy consultancy
firm Bridge to India. 

Let’s take a look at the model. 

The
The race
race to
to net
net zero
zero
In 2021-22, 15.5 gigawatt of renewable
energy (excluding large hydro projects) and
0.5 GW of hydropower capacity was added,
according to data from the Council on
Energy, Environment and Water. India’s
total renewable power generation capacity
stands at 150 GW. Now, given the
government’s goal to achieve 500 GW of
non-fossil fuel capacity by 2030, the
country still falls short of the total annual
deployment target of 40 GW a year.

This huge requirement for renewable

power projects is what Tata Power is
betting on.

The company’s renewables portfolio

consists of three major segments: Power
generation, solar cell and module
manufacturing, and value-added services. 

“Tata Power is much better placed as far as

renewables are concerned because it has a
presence across all the verticals in the
renewables space, right from power
generation to the manufacturing of solar
equipment,” says Upadhyay from HDFC
Securities.

Tata Power, as at the end of 2021-22, has

5.5 GW in renewable power output capacity,
which it wants to increase to 20 GW by
2027, an annualized growth of about
29.4%. Over the same five-year period, it
plans to reduce its thermal power capacity
by an annualized 1.8%.

But to understand how the company can

achieve this target, one needs to look at the
big picture.

As of 31 July 2022, the company’s power

generation capacity was 3,692 MW of solar
power, 932 MW of wind energy and 900
MW of hybrid power, totalling roughly 5.5
GW. Much of the current power generation
is in Gujarat and Rajasthan. Its clients
include Solar Energy Corporation of India,
NTPC and states with A+ and above ratings.

Apart from that, the firm is also working on

expanding its manufacturing capacity of
solar power equipment, just like its peers
Reliance Industries and the Adani group. Its
facility in Bengaluru has the capacity to
produce 500 MW of solar cells and 635 MW
of modules. On top of that, it’s now
building a unit in Tamil Nadu’s Tirunelveli
district for producing solar cells and
modules; the factory, with a 4,000 MW
capacity, will start operations next year. 

“In terms of technology, Indian module

manufacturers are trend followers as we
don’t invest much on R&D,” says Shantanu
Srivastava, energy finance analyst at the
Institute for Energy Economics and
Financial Analysis. “Technologies being
produced in India are usually being
replaced in other markets. It is expected
that India will have a capacity of 60 GW of
module manufacturing in the next couple
of years, which should help local players
attain economies of scale and be more
competitive.” 

At the same time, local players, including

the Tata group, are being incentivized to
produce solar equipment such as cells,
wafers and modules in India under the
government’s production-linked incentive
scheme, which promises to reduce the
country’s dependence on solar imports
from China.

Apart from making efforts in power

generation and manufacturing
components, Tata Power has been
expanding its base in renewable power
services. 

Focusing
Focusing on
on power
power
services 
services 
One such segment is engineering,
procurement and construction, or EPC. As
an EPC contractor, a company can help set
up a solar plant and offer services such as
designing the project, procuring
equipment, managing the project and
installing solar panels. 

Tata Power currently generates Rs 6,000

crore in annual revenue from the EPC
business and has a market share of 15% in
utility-scale EPC projects. The company
plans to increase its share of the EPC
market to 25% and boost revenue to Rs
20,000 crore by 2027.

Although raising capital to finance such

projects has not been a problem for big
companies, there are other challenges. 

“There is an oversupply of capital in

comparison to demand. In fact, the
dilemma for capital providers is to find
opportunities that offer them a reasonable
risk-reward,” says Rustagi from Bridge to
India. “So they are forced to bid
aggressively to win projects.”

Is there a fallout? 

Last year, several EPC players had bid

aggressively for large-scale projects, but
the sudden rise in the prices of solar
modules and cells rendered those projects
unviable; the bidders had to request the
government to postpone the delivery of
orders. 

“Earlier, they were making a 6 to 7%

EBITDA margin and a 3 to 4% PAT margin,
and that had shrunk significantly to about
1% EBITDA margin. But from this quarter,
we are seeing the margin inching up again
to 4 to 5%,” says Upadhyay. “For the
projects for which they had aggressively
bid, a large quantum of those projects has
already been executed and the new orders
already take care of inflated module prices.
This gives us assurance that, going ahead,
we won’t see such pressure on margins.” 

Tata Power’s order book for EPC projects

stood at Rs 15,000 crore for the quarter
ended 30 September 2022, an all-time
high.

That said, renewables are still at a nascent

stage, with companies as well as the
government trying to find a demand-
supply equilibrium. “Currently, there are
about 30,000 MW of projects that are not
viable. It is a rewind to the days of thermal
as people want to bid for big projects but
they find that their investments are not
viable,” says Rustagi.

Apart from the EPC segment, which is a

purely B2B service, Tata Power also sees
potential in the retail space. Solar pumps,
rooftop solar systems and EV charging
equipment contribute a fraction of the
overall revenue, but the company is
expecting to scale up this business. As of
2022, solar pumps were merely a Rs 700
crore business and the firm plans to ramp it
up to Rs 5,000 crore. 

And the segment holds promise for the

company.

Though renewable power generation is a

mature, de-risked industry, other parts of
the value chain, such as solar pumps and
rooftop solar [systems], are still in a
nascent stage of development, says
Srivastava from the Institute for Energy,
Economics and Financial Analysis. Since
these businesses have not scaled up and
there have been inconsistencies in
government policies, other big players have
stayed away from the segment. Similarly,
in the case of EV charging, Tata Power
remains the leader, he adds. But again, it’s
nowhere near the level at which investors
could start taking it seriously. 

“Another advantage [for Tata Power] is its

strong brand,” notes Rustagi. “That brand
is extremely valuable in retail markets like
rooftop solar, agricultural solar and EV
charging, etc., where it already has a strong
position and is further expanding rapidly.” 

To its credit, the company has installed

more than 13,000 home chargers and
nearly 3,000 public EV charging stations.
Besides, it has been setting up joint
ventures with several B2B customers such
as Tata Motors, Apollo Tyres and JP Infra
for developing EV charging infrastructure.
However, the overall infrastructure has
been slow to catch up. But that’s not the
only issue Tata Power faces.

A key challenge in the renewables supply

chain is the end consumer, or state power
distribution companies in this case. 

“Discoms are the last puzzle. Nobody has

been able to solve the problem so far. And
you have to be in a position to procure
power and make payments. I think you
rarely find any discom in the country that is
debt-free apart from discoms in states like
Gujarat,” says Vikram Reddy V., vice
president and sector head, corporate
ratings, at ICRA.

Apart from discoms, another market for

Tata Power is the commercial and
industrial sector, which has been growing
rapidly. As companies aim to achieve net-
zero emissions, “there is a very strong
push in the corporate renewable market
opening up a new segment for the
renewable sector,” says Rustagi. Vikram
Reddy from ICRA agrees. “Industrial
demand is almost 45% of the total demand.
So the potential will be greater there.” 

Since the company has been building its

renewables business from the ground up in
the last decade, it has the first-mover
advantage. Additionally, presence across
the value chain helps.

Largely, experts see potential in Tata

Power’s stock and its fundamentals.
However, what could pin the company
down is its traditional business, which is
thermal power generation. The firm earlier
had plans to hive off its renewables
business into an infrastructure investment
trust, but that hasn’t happened.

“The Tata Power stock includes non-

renewables businesses like [transmission
and distribution] and thermal power, which
are bigger than the renewables business,”
says Rustagi. “It’s therefore not possible to
draw any direct correlation between stock
prices and the renewables business.”

Upadhyay from HDFC Securities is bullish.

“Don’t look at the stock from a one-year
perspective. If you have a long-term view
and you believe in the renewables story of
India, at this price, [Tata Power] is still very
decently valued. If you want to bet on one
complete renewable player, Tata Power
would be the name,” he says. 

Going forward, as companies scale up their

renewables businesses rapidly, a lot
depends on how their management
overcomes risks. Hence, a lot for Tata
Power rides on how Sinha—or his
successor—tackles both external and
internal challenges.

Cover illustration by Rajat Baran and

graphics by Ahmed Raza Khan/The
Morning Context.

Adani Green Energy EPC EVs

Infrastructure NTPC

Power Distribution Power Sector

Power Transmission Praveer Sinha

Reliance Industries Renewables

Solar Power Tata Group Tata Power

Wind Power

About the author

Aakriti Bhalla

Aakriti writes at the intersection of public

markets and large corporations. She joined
The Morning Context from The Financial
Express, where she was with the markets
team, and before that had started out in
business journalism as a correspondent with
Reuters.

Disclaimers: The Morning Context has

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