Shares of Tata Power Company Ltd. are under scrutiny on Wednesday morning following an upgrade to ‘BBB-‘ from ‘BB+’ by S&P Global Ratings for the Tata group company’s issuer credit rating. The ratings agency stated that Tata Power has a bright future ahead of it. This goes against its June 13, 2024, “CreditWatch with positive implications” rating.
Given that the rating is capped at the sovereign level, the optimistic view is consistent with the forecast for India’s sovereign credit rating, according to S&P Global Ratings.
S&P Global upgraded Tata Power’s issuer credit ratings for the following five reasons:
Tata Sons
Tata Power is strategically significant to Tata Sons, according to S&P Global Ratings. The assessment has changed to reflect the Tata Group’s increased operational coherence and integration in recent years. Tata Sons’ longer-term commitment to group companies is strengthened by this increased operational integration, as is their motivation to offer support. According to S&P, the implementation of energy transition strategies by different group companies and Tata Motors’ expansion into the electric vehicle (EV) market have particularly boosted Tata Power’s integration within the group.
“These strategies include setting up solar power plants for Tata Motors, Tata Steel, and Tata Electronics, among others. Tata Power also assists with setting up the charging infrastructure to support Tata Motors’ EV business and joint bidding with Tata Motors for commercial EV projects,” it said.
Support
S&P Global stated that its expectation of strong exceptional support if needed, is supported by Tata Power’s close ties to the Tata brand and legacy as a significant asset under the group’s umbrella.
According to the statement, in the unlikely event that Tata Power experiences financial stress, reputational harm to the Tata brand would be a major source of support.
“The group has demonstrated such strong support in the past in cases such as Tata Teleservices Ltd., and the Mundra power project under Tata Power and Tata Steel Europe. Tata Sons has also injected equity into Tata Power, when needed, most recently in the fiscal year ended March 2021,” it noted.
Expected Cash Flows
According to S&P, operations with regulated returns or stable contracts for renewable energy account for 85% of Tata Power’s Ebitda. According to the corporation, the SACP also shows how much more integrated and varied its activities are when compared to rivals with comparable business risk assessments.
“We believe the company’s business profile will strengthen further over the next few years with likely capacity additions of at least 1 gigawatts (GW) of renewable power as well as expansion of its presence in the roof-top solar business and production of solar panels and modules,” it said.
Capex
Tata Power has kept up a significant investment program, primarily to expand its renewable energy division. Over the next two to three years, capital expenditures may average over Rs 15,000 crore, according to S&P.
“Although we expect this to increase leverage modestly, it is not likely to weaken Tata Power’s credit profile materially. We also believe the company will adjust its investment plans prudently to manage its leverage,” it said.
Due to Tata Power’s significant reliance on the Indian economy, which generates nearly all of its cash flows, S&P stated that its rating is limited by India’s sovereign rating.
