HSBC downgrades Tata Power but raises target to ₹300 on future earnings growth prospects

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Shares of Tata Power Company Ltd. were trading with losses after foreign brokerage firm HSBC downgraded the stock to ‘reduce’ but raised its target price to ₹300 per share. This suggests a further downside of 28% from the stock’s closing level on Thursday.

The global broking firm said that Tata Power’s fourth-quarter earnings missed consensus estimates but exceptional other income supported profitability.

Besides, competitive intensity and coal prices, HSBC believes that Tata Power’s future earnings growth is dependent on government approvals.

Recently, brokerage firm Goldman Sachs said it expected the Tata Power stock to fall as much as 45% over the next 12 months.

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 65% in the last six months and 100% 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.

The Tata Group company posted an 11% year-on-year (YoY) growth 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, and 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 have contributed towards the profits,” Sinha said.

Of the 21 analysts that cover Tata Power, eight have a ‘buy’ rating, three have a ‘hold’ call, and 10 have a ‘sell’ recommendation. Consensus among analysts suggests the stock to drop 20% from current levels.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow