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Net-zero agreements and the widespread installation of renewable energy as the dominant energy source should be central themes in the global energy market.
India is waking up to this, embarking on an ambitious clean energy initiative with The plan is to install 500 gigawatts (GW) of non-fuel capacity and 50% renewable energy by 2030.
The country is also making big bets: electric vehicles (EVs) in decarbonising the transport sector;, battery storage to provide renewable and controllable energy; and green hydrogen to decarbonise industries that are difficult to reduce.
Most of India’s renewable energy capacity expansion will come from major players, as the capital nature of the business requires access to substantial sources of capital on competitive terms.
Globally, a flood of funds are competing for renewable energy assets as social and environmental management (ESG) funds lead investors grow rapidly, Bloomberg estimates ESG assets under management will exceed US$ 53 trillion by 2025. India has the potential to attract large. Part of this capital gives clean energy goals and its ambitious decarbonisation.
Around the world, capital cities are competing with renewable energy assets.
Tata Power’s final deal was announced on the 14thTh April 2022, with the BlackRock Real Assets-led group, including Mubadala Investment, as evidence of the huge growth potential of Tata’s renewable energy business supported by industry-leading ESG exposure and decarbonisation commitments.
The deal enables Tata to meet competition from other major industry players such as Adani Group, Reliance Industries and JSW Group.
As part of the deal, the group will invest Rs 40bn (~US$526m) in two equal tranches for a combined stake of 9.76%-11.43% in Tata Power Renewable Energy Ltd (TPREL), a holding company for new integrated renewable energy. Tata Power’s business, valued at Rs 340bn (US$4.5bn).
TPREL houses engineering, procurement and construction (EPC) contracting, solar pump, rooftop solar infrastructure, renewable energy generation, EV charging infrastructure and module manufacturing businesses. At the current market value of the company (~11 billion US dollars), which translates into a ~40% value share of TPREL.
Additionally, considering the company’s current renewable energy capacity and pipeline, and TPREL’s net debt, the fiscal year (FY)23 EV/EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple for the deal is at ~14.2. yet. This compares to Bloomberg’s average analyst estimate of 14.3 times for the entire company, including the thermal power operation that accounts for most of the company’s business.
India’s target and the company’s track record may lead to continued growth
The agreement also sets valuation standards for other transactions in the near future. NTPC, the country’s largest power producer with the most ambitious green energy targets, plans to spin off its revitalized subsidiary. Similarly, JSW Energy, another utility switching to green energy, has reorganized its green and gray businesses to unlock past value.
After the announcement, analysts downgraded Tata Power’s stock price, citing lower-than-expected valuations for its renewable energy business, coupled with a surge in stock prices in recent months. IEEFA believes that this is temporary.
TPREL has many expansions across various business verticals in the new Holdco.
In terms of utility-scale renewable energy generation, India’s capacity-building goals and the company’s track record of winning competitive bids could translate into a continued growth pipeline for the business vertical.
Tata is also an early mover in the storage space, driving further growth for the renewable energy sector.
In solar manufacturing, Tata has installed 1GW of cell and module capacity with another 4GW under development, providing much needed control over capital costs while opening up the market for domestic sales as a base custom duty (BCD) startup.
Tata Power has de-risked its business by operating across the value chain, gaining Greater control over supply and input prices.
Tata has India’s largest EV fleet, another advantage
Its EPC capabilities (both internal and third party) and its past successful track record bode well for the growth of its EPC business. In addition, the entry of a large number of financial investors, as independent power producers (IPPs) reinvest capital in operating assets, widens the market for EPC services.
In rooftop solar, the company has the largest channel network in India. Ambitious government targets and current progress point to acceleration in the coming years.
The company also has a strong distribution network and brand traction with solar pumps, due to its business-to-customer (B2C) business. Helping Tata grow further here is a policy tailwind from annual energy subsidies of more than Rs 1 million crore (US$133bn) and the Indian government’s KUSUM program allocated for 3.5 million solar pumps over the next 3 years.
The company has the country’s largest EV charging fleet with more than 13,000 homes and 2,200 chargers installed, including public chargers and buses, demonstrating a first-mover advantage in a market where India’s energy security needs have significant growth potential.
Any of the above topics could result in Tata’s valuation being higher than it currently is as a newly created business.
The Tata and BlackRock deal is a good start for India. IEEFA noted that it will encourage more international players to invest in those Indian companies that are implementing clean energy solutions. This will help in achieving the company’s net-zero goal, while also accelerating India’s energy transition goals.
Shantanu Srivastava is Energy Analyst, IEEFA
* This is not investment advice. The author has a small investment in Tata Power.
This article first appeared on ET Energy World
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