Tata Power: Q2 renewable gains partly offset by weak solar EPC
Tata Power’s operating profit for the September quarter (Q2FY27) rose 11% year-on-year to ₹3,917 crore. But comparing this with the 26% revenue growth can be misleading, given the company’s diverse business mix. Its regulated power business, for instance, operates on a fixed return on equity (RoE) of 15.5%.
Profit from regulated operations moves in line with growth in regulated equity, making revenue growth and operating margins less relevant metrics. Investors should focus instead on Tata Power’s non-regulated businesses: renewable power generation, solar engineering, procurement and construction (EPC), and solar equipment manufacturing. These offer more meaningful comparisons with peers such as NTPC Green and Waaree Energies.
Renewables shine, but EPC stumbles
Renewable power generation was a bright spot, with operating profit rising 32% year-on-year to ₹1,061 crore, largely driven by a 25% increase in capacity to 7.1 GW. However, 11% load curtailment and transmission constraints remained dampeners. Battery energy storage solutions could help address curtailment.
Solar EPC, on the other hand, was a drag. Operating profit nearly halved to ₹180 crore in Q2, tempering the renewable generation business's strong performance. While rooftop solar projects, largely for residential use, did well, a sharp decline in large project orders hurt revenue and pulled down operating margin by 410 basis points year-on-year to 10%.
The solar equipment business, housed under TP Solar, has 4.3 GW of cell and module manufacturing capacity. Operating profit rose 10% year-on-year to ₹512 crore. Although module sales declined 19%, higher realizations and a better sales mix, with a larger share of sales to external customers, helped offset the weakness.
Key risks
The Mundra power plant and the legal battle with Kleros Capital Partners remain two key overhangs. Under the supplementary power purchase agreement (SPPA), Tata Power has until 31 December to continue Mundra operations. Management is confident of getting other states on board by then, as it did with Gujarat.
Kleros won its case in the Singapore International Commercial Court in August. Tata Power has not made any provision for a potential liability, having approached the Singapore Court of Appeal.
The company maintains that its capacity expansion and ₹25,000 crore capital expenditure plans for fiscal year 2027 (FY27) are on track. Renewable generation capacity is expected to reach 12.2 GW by FY28. Rival NTPC Green currently has 11 GW of solar and wind capacity.
If Tata Power delivers on this expansion target, its valuations could offer some upside. NTPC Green currently trades at an enterprise value (EV) of about ₹7 crore per MW of capacity. Applying the same benchmark to Tata Power's targeted renewable generation capacity would imply a valuation of nearly ₹84,000 crore for the business alone, equivalent to around 70% of Tata Power's current market capitalization of ₹1.16 trillion.
Similarly, Waaree Energies, a solar EPC player and equipment manufacturer, trades at an EV/Ebitda multiple of 9x, based on Bloomberg consensus estimates for FY28. Applying this multiple to Tata Power's solar EPC and equipment businesses would imply a combined valuation of about ₹27,000 crore, based on annualized H1FY27 financials.
The key caveat is leverage. Tata Power's net debt is expected to reach about ₹80,000 crore by FY28-end, way higher than that of NTPC Green and Waaree Energies. That said, the comparison needs to account for Tata Power's regulated power operations and other businesses, which provide an earnings base that its pure-play renewable and solar peers do not have.