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

Electricity is very important for the growth of an economy in this modern-day world.

Gone were those days when economic activity was limited to daylight hours. Once humans learned how to use and harness electricity, the economy grew rapidly.

With power being the most important component of a country's infrastructure, it is the responsibility of a country to ensure an affordable and uninterrupted power supply to everyone.

Yet, countries still face a dearth of power, resulting in a low per capita consumption compared to other nations.

Take, for example, India, the third-largest consumer and producer of electricity. However, the per capita consumption is less than a third of the global average.

However, with low penetration comes greater opportunity for growth. And the demand for power in India is expected to grow threefold between 2018 and 2040.

Though India has both non-renewable and renewable sources of energy, it still draws most of its power requirements from non-renewable sources such as thermal energy.

Two well-known private players in the thermal power category are Adani Power and Tata Power.

This article compares these two companies based on their fundamentals and future growth prospects.

Business Overview

Adani Power, part of the Indian conglomerate Adani Group, is India's largest private thermal power company.

It is a pioneer in setting up a coal-based supercritical thermal power plant in India.

The company has multiple short term, and long-term power purchase agreements (PPA) to sell power. It accounts for 6% of the total capacity of power generation in India.

It is also into renewable energy and has a solar plant in Gujarat.

Tata Power, part of the prestigious Tata Group, is a diversified power company.

Its presence across the value chain from generation transmission and distribution of power through traditional and renewable sources has helped it establish itself as the largest integrated power company in India.

The company is also present in consumer-centric businesses such as solar rooftops, pumps, microgrids, and electric vehicle (EV) charging stations.

	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 Tata Power is present across the power sector value chain, it has a considerable renewable energy portfolio.

Adani Power is purely into generating thermal power.

Revenue Growth

The first indicator of growth of a business is its revenue.

Adani Power vs Tata Power Revenue Growth (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue (in m)
Adani Power	203,042	238,841	264,677	262,214	277,111
Tata Power	275,605	308,868	303,502	337,355	439,227
Revenue Growth (%)
Adani Power	-10.2%	17.6%	10.8%	-0.9%	5.7%
Tata Power	-4.7%	12.1%	-1.7%	11.2%	3.0%

Source: Equitymaster

The revenue of Tata Power has grown at a compound annual growth rate (CAGR) of 8.7% against 6.4% of Adani Power in the last five years.

Despite India's under penetration of power, the top private players didn't see strong growth in their revenues. This is mainly because of a slowdown in economic growth and lower agricultural demand due to heavy monsoons.

The same is reflected in the lower volumes from thermal sources for both companies.

Adani Power vs Tata Power Thermal Sales Volume Growth (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Sales Volume (in m units)					0.7%
Adani Power	48,000	55,200	64,000	59,300	52,100
Tata Power	18,727	19,250	18,119	16,504	16,630
Sales Volume Growth (%)
Adani Power	-20.3%	15.0%	15.9%	-7.3%	-13.8%
Tata Power	1.2%	2.8%	-5.9%	-8.9%	0.7%

Data Source: Annual Reports

The volume for Adani Power fell 2.8% while that of Tata Power fell -4.5%% (CAGR) in the last five years.

For Adani Power, the volumes showed higher resistance to economic slowdown mainly due to long term power purchase agreements the company has with almost all its clients.

The fall in volumes for Tata Power is higher mainly because the company is slowly phasing out coal-based energy sources and replacing them with renewable energy.

Profitability

To determine a business's profitability one can use earnings before interest tax depreciation and amortisation (EBITDA) margin, and net profit margin.

The EBITDA margin is an indicator of the company's profits purely arising out of its operations as a percentage of revenue. It doesn't consider non-operating expenses such as interest, depreciation, and taxes.

In contrast, the net profit margin indicates the actual profit of the business as a percentage of revenue.

The EBITDA margin for Adani Power in the financial year 2022 was 35.3% against 19.1% of Tata Power. For Adani Power, the margin grew significantly over the years, while Tata Power maintained its EBITDA margin in the range of 23%-24%, barring this one year.

This was due to commissioning of new capacities that had lower utilisation and therefore lower volumes. Moreover, the company's coal business also suffered adding insult to injury.

Adani Power's pure thermal power play business had a higher EBITDA margin due to lower logistics costs and targeted cost-cutting initiatives at the plant level.

Adani Power vs Tata Power Profit Margins (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
EBITDA margin (%)
Adani Power	26.6%	20.7%	21.5%	33.1%	35.3%
Tata Power	23.0%	23.6%	26.8%	23.8%	19.1%
Net Profit Margin (%)
Adani Power	-10.2%	-4.1%	-8.6%	4.8%	17.7%
Tata Power	3.9%	4.0%	1.2%	1.7%	1.6%

Data Source: Ace Equity and Equitymaster

After turning profitable for the first time in the financial year 2021, the company's net profit grew by 2.8x in the financial year 2022.

Tata Power has been generating profits for a long time now with a five-year average net profit margin of 2.5%. The strong performance of the Solar EPC business combined with long-term power supply agreements has helped the company achieve that.

Power Generation Capacity

Adani Power has a total installed capacity of 12,415 megawatts (MW) across six power plants in India. It also has a solar power plant in Gujarat with a capacity of 40MW.

The company is adding 7,000 MW capacity across all its plants, including a 1,600 MW project in Jharkhand to supply electricity to Bangladesh.

On the other hand, Tata Power has a total installed capacity of 13,515 MW across thermal, solar, wind, hydro, and waste heat recovery sources.

While thermal energy accounts for 65%, down from 69% in 2021 of the total capacity, the rest is from renewable energy sources.

The company aims to improve its green portfolio to 40% by 2030 by slowly phasing out coal-based energy sources.

Tata Power also manages a transmission network of 3,552 km and a distribution network of more than four hundred thousand circuit km across India, catering to over 12m consumers

Research and development (R&D) initiatives

Adani Power was the first company to introduce the cutting-edge supercritical power generation unit in India in 2010.

Since then, the company has been leveraging technology to deliver high efficiency and gain a competitive edge in the power sector.

On the other hand, Tata Power is investing in smart grid technologies to establish a resilient network across the value chain.

It also leverages technology to develop affordable and low carbon energy solutions for its customers.

Dividends

Some investors tend to invest in dividend stocks with an expectation of earning some return in the form of capital appreciation and regular income.

The regular income that investors receive is a dividend which is a share of the company's profits.

The dividend payout ratio and dividend yield are two ratios that help determine which company is paying a higher dividend to its shareholders.

The dividend payout ratio determines how much dividend the company is paying against the company's earnings. The dividend yield determines how much dividend return one gets against the price of the share.

The higher the ratios, the better.

Tata Power Dividend Ratios (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Dividend Payout Ratio (%)	130%	130%	155%	155%	175%
Average Dividend Yield (%)	1.6%	1.8%	4.7%	1.5%	0.73%

Data Source: Ace Equity

Tata Power has consistently paid dividends to its shareholders for the last five years. Its five-year average dividend payout and average dividend yield stood at 149% and 2.1%, respectively.

On the other hand, Adani Power didn't pay any dividends to its shareholders.

High debt and negative free cashflows could be the main reason why the company hasn't paid a single dividend to its shareholders.

Debt-to-equity ratio

The debt to equity ratio measures how much debt the company uses against its equity. An ideal ratio is one or below, while anything above two is considered risky.

Adani Power vs Tata Power Debt to Equity Ratio (2017-2022)

Debt to Equity Ratio (x)	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Adani Power	22.4	4.4	5.5	3.3	2.5
Tata Power	1.5	1.9	1.8	1.4	1.5

Source: Equitymaster

Both Tata Power and Adani Power have used leverage to fund their business. Tata Power's debt to equity ratio stands lower at 1.5x in the financial year 2022.

This was due to the capacity expansion at its Odisha plants and increased costs from the renewable capacity expansion.

Tata Power enjoys a comfortable debt position to support its growth, with a net debt to equity of 1.5x. The current interest coverage ratio stands at 1.62x.

On the other hand, Adani Power has a debt-to-equity ratio of 2.5x and an interest coverage ratios of 2.6x in the financial year 2022. This clearly indicates its balance sheet is over-leveraged.

Return on capital employed (ROCE)

Return on capital employed, expressed as a percentage, is considered a good measure to estimate how well the company's capital is put to use.

In other words, it measures how much profit the business is generating from its capital.

Adani Power vs Tata Power Return on Capital Employed (2017-2022)

ROCE (%)	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Adani Power	9.8%	10.6%	6%	13.9%	17.9%
Tata Power	7.9%	10.1%	8.2%	7.7%	7.27%

Source: Equitymaster

The five-year average return on capital employed of Adani Power and Tata Power is 10.4% and 8.4%, respectively.

Adani Power generates a higher return on capital than Tata Power, reflecting its wise capital allocation. Going forward, this number will only improve as the company is concentrating on deleveraging its balance sheet.

Valuations

Analysts determine whether a company is overvalued or undervalued through valuation ratios such as price to earnings (P/E) ratio and price to book value (P/BV).

The P/E ratio tells how much a potential investor is willing to pay for one rupee of earnings. In contrast, the P/BV ratio tells how much the potential investor is willing to pay for one rupee of book value.

High ratios indicate the company is overvalued.

Adani Power vs Tata Power Valuation Ratios (2017-2022)

	P/BV Ratio	5-year Average P/BV	Average P/E Ratio	5-year Average P/E
Adani Power	5.5	3.0	20.8	38.5
Tata Power	3.1	1.3	37.4	18.5

Data Source: Ace Equity

At the current market price of Rs.213, Tata Power is available at a P/E ratio of 37.4x while, Adani Power, at the current market price of Rs.264 is available at a P/E of 20.8x.

Tata Power's shares are slightly overpriced than Adani Power's shares in terms of P/E.

However, in terms of P/BV, Adani Power's shares look overpriced with a ratio of 5.8x, while Tata Power's P/BV stood at 3.1x for the financial year 2022.

When compared to their five-year averages both the shares seem overvalued, despite the current correction in the market.

Sustainability efforts

India ranks third in the world for emissions of greenhouse gases.

It is also home to the most polluted cities in the world.

A thermal plant contributes over half sulphur dioxide concentration, 30% nitrogen oxide and 20% particulate matter to the air.

With the power sector being one of the most critical components of the economy, it falls upon the companies in this sector to ensure they are doing their bit to save the environment.

Tata Power aims to reduce its carbon footprint by phasing out its existing capacities of coal and fossil fuels.

It is replacing these with renewable sources of energy.

The company is also playing an active role in the electric vehicle revolution by setting up EV charging stations across the country for major automobile companies.

To achieve carbon neutrality, Tata Power makes its sustainable products more affordable to its customers.

On the other hand, Adani Power is a pioneer in setting up ultra-supercritical thermal plants to increase efficiency and reduce carbon footprint.

It is reducing the consumption of resources and is optimising their water consumption. The company also has a 106% utilisation of fly-ash, a residue of thermal plants.

Both the companies have contributed significantly to the environment by taking steps towards waste management.

Future prospects

Though India is the third-largest consumer of electricity, its per capita consumption is much lower than the global average.

There is much scope for growth in this sector. This coupled with government initiatives such as 'Power for All', rising population, and the government's aim to make India a manufacturing hub, will boost the growth of this sector.

To capture the rising demand, Adani Power has been concentrating on increasing its capacity across new and existing plants.

On the other hand, Tata Power is foraying into renewable energy and is aggressively increasing its renewable energy portfolio.

The company has also ventured into solar engineering procurement and construction (EPC) and EV charging stations to capture the rising demand for cleaner energy sources.

Which is better?

Adani Power has a higher revenue growth and operating margin than Tata Power, indicating operational efficiency.

Even during an economic slowdown, the company's volumes weren't impacted much, mainly due to long term power purchase agreements with its customers.

However, Tata Power has lower leverage ratios than Adani Power, indicating a strong credit profile.

The company also has positive free cash flows and has consistently paid dividends to its shareholders for the past 20 years.

When compared to Adani Power, the shares of Tata Power look undervalued.

While Adani Power is solely into generating power through thermal sources, Tata Power has an established its presence across the entire energy value chain through thermal and renewable energy sources.

While both the companies are dominant players in their own categories, before you consider investing in any stock, check for the fundamentals and valuations of both companies. It will help you make a more rational decision.

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 Power vs Tata Power

You can also compare both the companies with their peers.

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

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

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...