Adani Green vs Tata Power: Which Power Stock is Better?

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  • Jan 29, 2022 - Adani Green vs Tata Power: Which Power Stock is Better?

Adani Green vs Tata Power: Which Power Stock is Better?

Jan 29, 2022

Adani Green vs Tata Power: Which Power Stock is Better?

India is the world's third-largest energy consumer.

Currently, 60% of India's power needs are met through coal. However, with rising concerns over climate conditions, India has pledged to move towards cleaner alternatives.

By 2030, India aims to increase the share of renewable energy by 40%. Many public and private power companies are set to be a part of this change.

Among them, Tata Power and Adani Green Energy are the two well-known players in the industry.

In this article, we compare the two companies based on their operations, financials, and efforts to create a sustainable future.

Business Overview

Adani Green Energy is one of the largest renewable companies in India. It is also the largest solar power generation company globally.

The company primarily generates power through renewable sources such as solar and wind energy. It also builds, develops and maintains utility-scale grid-connected solar and wind farm projects.

The company's major clients are central, state and government-backed corporations. It has long-term power purchase agreements (PPA) of 25 years with them indicating its dominant presence in the power and utility sector.

Tata Power is one of the largest integrated power companies in India.

The company is involved in generating, transmitting, and distributing power through conventional and renewable energy sources.

It is also expanding its portfolio into consumer-centric businesses solar rooftops, pumps, microgrids, electric vehicle (EV) charging stations, home automation, floating solar, energy services (energy as a service), and power trading.

Its presence across the energy value chain helps achieve operational efficiency, making Tata Power a diversified power company.

Currently, 32% of its energy portfolio comprises of renewable energy. It aims to increase it to 80% by the financial year 2030.

Adani Green vs Tata Power Business Overview

  Adani Green Energy Tata Power
Products/Services Thermal energy
Renewable Energy
Solar and wind farm projects
Power generation - Thermal and Renewable
Transmission
Distribution
Consumer centric business
Energy as a service
Power Trading
Competitive Advantage Strong order pipeline
Long term power purchase agreements (PPA)
Diversified presence across energy value chain
Pan India presence
Experienced and well established player in the energy sector
Data Source: Annual Report

While Adani Green has a significant presence in the renewable energy business, Tata Power has a presence across the energy value chain from power generation and distribution to energy services.

Revenue growth

Though Tata Power's revenue is almost 20 times that of Adani Green's, its revenue in the last five years (2017-2021) has grown at a mere CAGR of 3.1% compared to 41% of Adani Green's.

Adani Green vs Tata Power Revenue Growth (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Revenue (in m)          
Adani Green 6453 15314 21710 27090 35990
Tata Power 289,085 275,605 308,868 303,502 337,355
Revenue Growth (%)          
Adani Green   137.3% 41.8% 24.8% 32.9%
Tata Power   -4.7% 12.1% -1.7% 11.2%
Source: Equitymaster

The revenue growth for Tata Power was driven by thermal power energy in the initial years. However, in the last couple of years, the revenue growth was led by growth in its consumer business.

For Adani Green, the revenue growth was led by higher volumes due to improvement in power generating capacity.

Volume growth of renewable sources of energy

The renewable energy volumes of Adani Green and Tata Power have grown at a CAGR of 43.9% and 16.5%, respectively, in the last five years.

Adani Green vs Tata Power Renewables Sales Volume Growth (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Sales Volume (in m units)          
Adani Green 792 1,805 3,879 4,373 4,886
Tata Power 2,113 3,227 3,827 4,444 4,529
Sales Volume Growth (%)          
Adani Green   127.9% 114.9% 12.7% 11.7%
Tata Power   52.7% 18.6% 16.1% 1.9%
Data Source: Annual Report

The high-volume growth of Adani Green is due to rapid capacity expansion and a strong order book in the renewables segment.

For Tata Power, the volume growth from renewable energy can be attributed to the growing demand for renewable energy sources. Also, the company saw a decline in volumes from traditional energy sources over the last five years, indicating the company's growing interest in renewable energy sources.

Profit margins

Operating profit margin indicates what percentage of the operating revenue is the profit after paying for all operating expenses.

Adani Green is leading with a five-year average operating profit margin of 65.8% against 22.8% of Tata Power.

Adani Green vs Tata Power Profit Margins (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Operating Profit Margin (%)          
Adani Green 80.4% 56.3% 74.1% 49.4% 68.9%
Tata Power 17.1% 25.5% 26.5% 24.7% 20.2%
Net Profit Margin (%)          
Adani Green -9.2% -9.3% -22.9% -2.4% 5.6%
Tata Power -4% 3.9% 4% 1.2% 1.7%
Source: Equitymaster

However, in terms of net profit margin, Tata Power is leading with a five-year average net profit of 1.4%. On the other hand, Adani Green's five-year net profit margin stands at -7.6%.

The margins for Tata Power were driven by the strong performance of its solar EPC and solar power business in the last couple of years.

For Adani Green, higher electricity generation has helped the company lower its costs over the years, leading to a positive margin in the financial year 2021.

Power generation capacity

Adani Green has a renewable energy portfolio of 19,340 megawatts (MW).

In the financial year 2021, the company had 3,470 operational projects and 15,870 under construction and locked-in growth projects.

The company is continuously expanding its portfolio through greenfield and brownfield expansion. It has a vendor base of more than 20,000 across India to distribute power.

On the other hand, Tata Power has a 13,068 MW power generation capacity, of which 4,207 MW (32.2%) is a green portfolio.

The company also manages a transmission network of 3,532 km and a distribution network of more than four hundred thousand circuit km across India. It serves more than 12 m customers across 16 countries.

Research and development (R&D) initiatives

Tata Power has been actively investing in smart grid technologies to identify opportunities to transform into an Energy as a Service (EaaS) business model.

It also leverages technology to develop and offer low carbon energy solutions to its customers at affordable rates.

On the other hand, Adani Green is investing in market research to identify suitable land for expanding its capabilities.

Dividends

A company shares profits with its shareholders in the form of dividends. Dividends can be in the form of cash or stock.

Dividend ratios such as dividend payout ratio and dividend yield can be used to compare both companies' dividends.

The dividend payout ratio determines how much dividend is paid from the earnings. In contrast, the dividend yield tells us what percentage of the share price is the dividend amount per share.

The higher the ratios, the better.

Adani Green vs Tata Power Dividend Ratios (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Dividend Payout Ratio (%)          
Adani Green 0% 0% 0% 0% 0%
Tata Power -279% 33% 29.2% 115% 87.6%
Average Dividend Yield (%)          
Adani Green 0% 0% 0% 0% 0%
Tata Power 2% 2% 1.7% 3% 2.2%
Source: Equitymaster

Tata Power has consistently paid dividends to its shareholders for the last five years. Its three-year average dividend payout stands at 77.3% while its three-year average dividend yield stands at 2.3%.

On the other hand, Adani Green hasn't paid any dividends to its shareholders. This is mainly due to its aggressive expansion plans to become the largest renewable company in the country.

Credit profile

The debt-to-equity ratio measures the extent of leverage a company uses to run its business. The lower the leverage, the stronger its credit profile.

Adani Green vs Tata Power Debt to Equity Ratio (2016-2021)

Debt to Equity Ratio (x) 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Adani Green 3 6.2 5.1 5.4 9
Tata Power 1.9 1.5 1.9 1.8 1.4
Source: Equitymaster

In the financial year 2021, Tata Power and Adani Green have a debt-to-equity ratio of 1.4 and 9, respectively.

Tata Power has taken effective steps to deleverage its balance sheet. In the recent quarter, the company reduced its gross debt to the extent of Rs 30 bn despite a capex of Rs 16 bn.

On the other hand, Adani Green Energy has been taking on debt to fund its capex initiatives. However, the company enjoys a low-interest rate keeping the finance costs to a minimum.

Return on capital employed (ROCE)

Return on capital employed measures how much profits the company generates through its capital. Again, the higher the ratio, the better.

The five-year average ROCE of Tata Power and Adani Green is 11.3% and 5.9%, respectively.

Adani Green vs Tata Power Return on Capital Employed (2016-2021)

ROCE (%) 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Adani Green 4.4% 3.5% 4.9% 6.8% 9.8%
Tata Power 9.4% 13.4% 13.4% 10.8% 9.7%
Source: Equitymaster

Tata Power is generating higher returns for shareholders with respect to the capital employed than Adani Green.

Return on Equity (ROE)

Return on equity (ROE) measures how efficiently the company uses its equity capital to generate profits.

The five-year average ROE of Tata Power stands at 3.6% while for Adani Green the ratio has been consistently negative.

Tata Power has been more stable in generating returns for its shareholders. However, Adani Green's has overtaken Tata Power in terms of ROE in the financial year 2021.

Adani Green vs Tata Power Return on Equity (2016-2021)

ROE (%) 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Adani Green -3.8% -10.2% -24.4% -2.6% 8%
Tata Power -1% 7.1% 7.2% 2% 2.7%
Source: Equitymaster

Valuations

The Price to Earnings ratio (P/E) and Price to Book Value (P/BV) are valuation ratios that help determine whether the company's share price is overvalued or undervalued.

The P/E ratio indicates how much an investor is willing to pay for one rupee of earnings. A high P/E ratio indicates the shares are trading at a premium.

The P/BV ratio measures the market valuation of a company to its book value. A high P/BV ratio indicates the share is overvalued.

The P/E and P/BV ratios of Adani Green stood at 662.3 and 53, respectively, for the financial year 2021.

For Tata Power, the P/E and P/BV ratios stood at 40.1 and 1.1, respectively.

Adani Green is trading at a premium to Tata Power in terms of both P/E and P/B. This implies that Tata Power's shares are priced at much lower valuations than Adani Green.

Adani Green vs Tata Power Valuation Ratios (2020-2021)

  P/BV Ratio Average P/E Ratio
Adani Green 53 662
Tata Power 1.1 40.1
Source: Equitymaster

Free cash flows

Free cash flow is the amount of cash the company has after paying its operating expenses.

A positive free cash flow indicates the company has excess cash to distribute to shareholders or use for other investment opportunities.

Adani Green's cashflows have been negative for the last five years. This indicates the company has no free cash to fund its future investments or to distribute to shareholders.

On the other hand, Tata Power has been cash flow positive in the financial year 2021, which it can use for funding investment opportunities, prepay a part of the debt, or pay dividends to its shareholders.

Adani Green vs Tata Power Free cashflows (2016-2021)

Free cashflows (Rs m) 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Adani Green -10,048 -42,279 -21,865 -28,590 -61,100
Tata Power 1,762 8,323 -17,943 14,459 12,288
Source: Equitymaster

Sustainability efforts

India is the third-largest energy consumer in the world after USA and China with the fifth largest installed thermal power capacity in the world.

However, it also ranks third in emissions of greenhouse gases.

Therefore it is very important for the companies in this sector to reduce their carbon footprint.

Both Adani Green and Tata Power are increasing their investments in renewable energy space to produce green energy.

Adani Green has been providing green energy for several years now and is investing to increase its renewable energy mix. The company is also focusing on reducing its consumption of resources and efficiently managing its waste.

On the other hand, Tata Power is phasing out its existing thermal capacities and has stopped investing in new ones. It is concentrating on using resources responsibly, foraying into renewable energy at a faster pace.

The company has also been making its sustainable offerings in the consumer business more affordable and accessible to encourage its consumers to adopt a sustainable lifestyle.

Impact of Covid-19

The pandemic had disrupted the demand for power in the country in the first half of the financial year 2021. There were supply chain bottlenecks and significant changes in the energy consumption patterns.

As a result, the revenue and profitability of both companies were impacted at the time. However, the demand picked up once the lockdown restrictions were eased, and the power consumption in India was the highest at 190 gigawatts (GW).

Going forward, the demand for power will continue to rise as India's population grows. Government initiatives such as 'Power for all' will also increase energy consumption in the country.

Future prospects look bright

India's per capita energy consumption is less than half the global average. With rising population and government initiatives to make India a manufacturing hub, the energy usage in the country is expected to grow.

The government is encouraging energy companies to produce cleaner power by giving high incentives and subsidies. This has given a much-needed boost to the renewable energy space.

Tata Power is continuing to expand across all its businesses. It is aggressively investing to increase its renewable energy portfolio.

It is also collaborating with automobile companies and original equipment manufacturers (OEMs) to roll out EV charging infrastructure in the country.

On the other hand, Adani Green's partnership with Total, a French energy company, is expected to increase its in footprint in the clean energy space.

The company has also secured many orders indicating a solid revenue growth in the medium term.

Which is better?

Though Tata Power's revenues are almost 20 times Adani Green's, it has a lower revenue and volume growth.

However, Tata Power is leading in terms of net margin. It also pays higher dividends to its shareholders, has a lower debt-to-equity ratio, and gives a higher return to its shareholders.

With its presence across the energy value chain, Tata Power is looking to capitalize on the entire growth in the power sector.

Adani Green, on the other hand, has a higher share of renewables in its power portfolio. It also has a high operating margin, indicating its operational efficiency.

In terms of valuations, Tata Power is leading. Its shares are less expensive than Adani Green.

While both the companies are dominant players in the energy space, before taking a leap and investing in them, go through the fundamentals and valuations of both the companies. It will help in your decision-making process.

Still confused which is better?

Use our feature-rich comparison tool, which draws a detailed comparison between any two companies. This tool also includes a graphical analysis making it easy for you to see trends!

Adani Green vs Tata Power

You can also compare both the companies with their peers.

Adani Green vs NTPC

Tata Power vs Power Grid

Adani Green vs Reliance Power

Tata Power vs PTC India

Check out the Adani Green Energy factsheet and Tata Power factsheet for a detailed analysis.

You can also check out the latest quarterly results for Adani Green Energy and Tata Power.

Since stocks from the power sector interest you, check out Equitymaster's powerful Indian stock screener tool to find the top power companies in India.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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