Tata’s Green Power Play

India’s decision to add 500 GW renewables to its energy mix has triggered a power sector marathon. Whoever greens the fastest will win. Tata Power is training hard

More than a hundred years ago, standing by the Kundalika river in Roha near Mumbai (then Bombay), Tata Group founder Jamsetji Tata had an epiphany. Staring at the ebb and flow of the water, Jamsetji wondered if the river could be harnessed to power Mumbai. And thus, was born Tata Power. The company, 109 years later, finds itself at the crossroads again.

India wants to add 500 gigawatt renewable energy capacity by 2030 to meet its carbon emission reduction targets. But as of June 8, thermal power made up 54.9% of India’s total installed capacity, Union power ministry data shows. The Central Electricity Authority’s update for April shows thermal makes up for 79.8% of India’s total energy generation.

A new power economy is the need of the hour. What will that mean for Tata Power?

“The company has expanded itself in the renewable space. It is not just about setting up large utility-scale plants. We have built large utility-scale plants of every type—solar, wind, hybrid and bundled power among others,” says Praveer Sinha, Tata Power’s chief executive.

Tata Power has plans to spend big over the next decade. In January, the company announced a Rs 70,000-crore investment to build 10 gigawatt of solar and wind capacity in Tamil Nadu. The big capital push comes after years of deleveraging and shifting strategic priorities.

Getting a Messy House in Order

The past decade was challenging for India’s power sector. Investments only trickled in. The average plant load factor of thermal plants—a measure of actual power output against the maximum possible—shrank from 77.68% in 2009–10 to 55.89% in 2019–20. Companies struggled to make optimum use of their plants. Their cash flow suffered. In April 2019, outstanding dues of state government-owned discoms reached Rs 21,198 crore.

With the whole sector in turmoil, Tata Power found itself in the middle of a storm. Its net debt to equity ratio, a measure of companies’ liabilities against total shareholder equity, rose from 0.55 in 2009–10 to 1.99 in 2019–20. The company’s consolidated profit after tax (PAT) fell from Rs 1,966.84 crore to Rs 1,316 crore in the same period. Between 2014 and 2019, its share price had fallen by 17%.

But soon, the company laid out a strategy to revive growth and win the trust of investors who were beginning to grow pessimistic about its prospects. Tata Power focused on simplifying its business operations, divesting subscale assets, aligning with initiatives at the group level and scaling up renewables and distribution.

In April 2020, Tata Power sold its stake in Cennergi, a joint venture it had with leading South African coal producer Exxaro Resources. In July 2020, the company sold its shipping assets. The same month, it completed a preferential issue of equity shares to Tata Sons.

As the balance sheet was being optimised, Tata Power was expanding in the renewables and distribution business. With Delhi, Mumbai and Ajmer already in its kitty, in December 2019, the company bagged the discom licence for Odisha for 25 years at Rs 175 crore. The Odisha deal helped the company’s customer base go up to 1.3 crore in 2024. Simultaneously, its renewable operational capacity grew from 2 gigawatt in March 2019 to 4.5 gigawatt in April 2024.

Tata Power’s diversification has been a major factor in reviving growth, says Arpit Jain, joint managing director at Arihant Capital. “The company’s focus on green projects has led it to earn profits, and this sector is poised for growth. These efforts have positively impacted Tata Power’s share prices, reflecting investor confidence and market validation of the company’s strategic initiatives,” says Jain.

In the past five years, Tata Power’s share price surged by over 590%. Consolidated PAT has grown from Rs 1,316 crore in the 2020 fiscal to Rs 4,280 crore in the 2024 fiscal, a 225% rise. The deleveraging efforts have also paid off with the debt-to-equity ratio falling to 0.99 in the last fiscal.

Sinha says the company has stabilised. “All our businesses are maximising efficiency and profitability. Going forward, this will keep increasing as the foundations of the business are strong. Moreover, the benefits of Rs 12,000 crore capex undertaken last year will be reflected this year. There is Rs 20,000 crore capex planned for this year whose benefit will show next year,” he tells Outlook Business.

The company has indeed managed to maximise profitability. But its profits from coal-based operations took a hit last fiscal. Brokerage Nuvama Institutional Equities estimates that profits from coal and ultra mega power projects suffered a 69% decline in the 2024 fiscal. The decline in coal profits was due to the cooling of coal prices, the brokerage says. 

Tata Power has not added any thermal capacity. Thus, the thing to watch out for will be the 
share of the company’s earnings from renewables.

Green Play

On March 31, 2024, Tata Power’s total capacity stood at 14.7 gigawatt. Of this, 8.86 gigawatt, roughly 60%, was from thermal while solar and wind made up for 4.5 gigawatt, around 30%. The remaining was from other clean sources such as hydro and waste heat recovery. The company plans to cut down its reliance on thermal to 30% in the next six years.

Sinha says Tata Power is transitioning into a more consumer-centric company. To this end, the availability of green power throughout the day becomes crucial. This is probably why the company’s portfolio of renewable energy is set for drastic change once it completes the projects that are under construction.

According to company data, the share of hybrid projects—combining solar and wind—was at 3% at the end of last fiscal. When 5.5 gigawatt of renewable capacity is added as the projects in the pipeline get completed, this share will jump to 24%. Tata Power is present in all the right places, says Subhadip Mitra, executive director at Nuvama Group.

“The long-term outlook for the company looks intact but the addition of renewable capacity appears to be slower than what is required to meet its targets. A lot of the renewable capacity is under construction so its impact will be fully visible on earnings when they start hitting the ground around financial year 2027,” he says.

Reflecting on Tata Power’s hybrid push, Mitra says it appears to be a good bet for the company. “They should have adopted it faster. The storage model using the pumped hydro technology can work out well for Tata Power as it can leverage its existing hydro infrastructure. Solar and wind along with pumped hydro storage can be a good long-term solution. The company will have cost advantages against peers in capex for pumped hydro storage given existing hydro power infrastructure already in place near Mumbai,” adds Mitra.

Tata Power’s PAT from renewables saw a meagre 2% gain between 2023 and 2024 of Rs 748 crore. It wants to double its 2023 net profit in the next three years. An estimate by Nuvama suggests the company may be able to fulfil its target after it reaches its 15 gigawatt renewable energy target and finishes its captive solar manufacturing plant. Sinha says Tata Power is well placed to deliver strong growth because it is present across the value chain.

An advantage for Tata Power in the green energy race is its presence in the rooftop solar space. In the interim budget for financial year 2025, the Union government announced a scheme to instal rooftop solar panels in 1 crore households. To promote the scheme, the government has guaranteed 300 units of free electricity. Tata Power already has around 20% market share in the rooftop solar space and is expected to gain from the government push.

On relying on the rooftop solar scheme, Nuvama’s Mitra strikes a note of caution. “There have been attempts earlier as well to boost rooftop solar. But they did not pan out as expected. Although the frenzy is understandable, it is not clear how the economics of installation of these panels and then providing free electricity will work,” he says.

Winning in the Green New World

The new power universe will be ruled by players who will be able to meet the soaring demand for green energy.

And the competition is intensifying. Adani Green recently became the first company to obtain 10 gigawatt of renewable energy. Reliance and Adani have both announced plans for green hydrogen. JSW Energy and NTPC are also going big on green. This continuous evolution within a competitive sector where gestation periods are high will be something Tata Power will have to watch out for.

“Tata Power is in a unique position in the emerging electric order. The company is entirely backward and forward integrated. It is not only distributing power in major urban centres of the country but also producing energy. The company controls many aspects of the value chain,” says Amit Goel, co-founder and chief global strategist at brokerage Pace360.

For now, investors seem optimistic about Tata Power’s prospects. The company’s shares are up by over 36% in 2024. Bloomberg reported in May that the company is in talks with lenders to raise $1 billion for clean energy projects. With the fate of Tata Power tied to its green plans, observers say delays in execution of renewable projects could become a problem for the company as a large share of its profits are supposed to come from them.

Another area of concern is the economics of renewables. India’s power sector has seen the consequences of irrational tariff bidding due to stiff competition in the recent past. The wind sector suffered when the tariffs did not align with the cost of running the plants.

The contours of the green energy sector are only beginning to take shape, and there is a long road ahead. There are questions on whether green energy will be enough to power the diverse needs of the fastest-growing economy on the planet. Tata Power thinks it has some of the answers. The rest are best left to time.