Global brokerage and research firm Jefferies had initiated coverage on power stocks in India. It highlighted that restrictions and increased duties on module imports and module price volatility are impacting the sector’s growth. In addition, it believes that State Electricity Boards (SEBs) are taking their time to sign new power purchase agreements (PPAs).
Some of its top picks in the sector include NTPC, Power Grid Corporation of India and JSW Energy. However, it has an underperform rating on Indian Energy Exchange (IEX) and Tata Power.
The main reason for Jefferies’ negative stance on Tata Power has been concerns about its medium-term ROE being below the cost of capital on its power asset basket. In addition, the Mundra tariff hike resolution is not seeing a favourable stance from SEBs yet.
The company’s shares closed at ₹ 206.05 apiece on Thursday. Jefferies has a target price of ₹ 180 on the company’s shares. This translates to a downside of 12.64% as compared to its share price.
Tata Power is a large-cap company with a market capitalization of ₹ 65,776 crores. It has a return on equity of 9.74% and a high debt-to-equity ratio of 2.07. However, capital-intensive companies, like the ones in the power sector, tend to have a high debt-to-equity ratio.
Its shares were trading at a price-to-earnings ratio (P/E) of 25.80, which is significantly higher than the industry P/E of 10.98, indicating that it might be overvalued as compared to its peers, or investors are willing to pay a higher price for its future earnings.
Written by Simran Bafna
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