Why is Tata Power Company Ltd falling/rising?

Recent Price Movement and Market Comparison

Tata Power’s shares closed at ₹353.30, down ₹10.20 or 2.81% on 20 January, continuing a downward trend that has persisted for five consecutive days. Over this period, the stock has declined by 4.62%, underperforming its sector by 0.88% on the day. The intraday low touched ₹351.25, marking a 3.37% drop from the previous close. This weakness is further underscored by the stock trading below all key moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day averages, signalling sustained bearish momentum.

When compared to the benchmark Sensex, Tata Power’s recent returns have lagged significantly. Over the past week, the stock has fallen 4.10%, more than double the Sensex’s decline of 1.73%. The one-month and year-to-date returns also reflect this underperformance, with losses of 7.15% and 6.92% respectively, compared to the Sensex’s more modest declines of 3.24% and 3.57%. Over the last year, while the Sensex has gained 6.63%, Tata Power has generated a negative return of 5.65%, highlighting its relative weakness in the market.

Fundamental Strengths Amidst Challenges

Despite the recent price weakness, Tata Power exhibits some positive long-term fundamentals. The company has demonstrated healthy growth in net sales at an annual rate of 18.37%, alongside operating profit growth of 16.23%. Its return on capital employed (ROCE) stands at 9.7%, suggesting a fair valuation, especially given its enterprise value to capital employed ratio of 1.8. Notably, the stock trades at a discount relative to its peers’ historical valuations, which could appeal to value-oriented investors.

Institutional investors hold a significant 26.86% stake in the company, with their holdings increasing by 0.52% over the previous quarter. This indicates confidence from sophisticated market participants who typically conduct thorough fundamental analysis before increasing exposure.

Debt Burden and Profitability Concerns

However, the stock’s decline is largely attributable to significant concerns over its financial health and profitability. Tata Power’s ability to service its debt is notably weak, with a high Debt to EBITDA ratio of 5.03 times. This elevated leverage raises questions about the company’s financial flexibility and risk profile, especially in a rising interest rate environment.

Profitability metrics also paint a challenging picture. The company’s average return on capital employed over recent periods is 8.07%, indicating relatively low profitability per unit of capital invested. The half-year ROCE is even lower at 10.50%, while the operating profit to interest coverage ratio for the quarter stands at a modest 2.50 times, signalling limited cushion to meet interest obligations. Furthermore, the latest quarterly profit after tax (PAT) of ₹919.44 crore has declined by 11.0% compared to the average of the previous four quarters, adding to investor concerns.

These fundamental weaknesses have contributed to the stock’s underperformance relative to the broader market. While the BSE500 index has delivered a 4.98% return over the past year, Tata Power has lagged with a negative return of 5.65%, reflecting investor caution and risk aversion towards the company’s financial position.

Investor Participation and Liquidity

Adding to the bearish sentiment, investor participation has diminished recently. Delivery volume on 19 January was 12.03 lakh shares, down 47.09% from the five-day average, indicating reduced buying interest. Despite this, the stock remains sufficiently liquid for trades up to ₹2.89 crore based on 2% of the five-day average traded value, allowing institutional and retail investors to transact without significant price impact.

Conclusion

In summary, Tata Power Company Ltd’s share price decline as of 20 January is driven by a combination of weak recent price performance, concerns over its high debt levels and limited ability to service that debt, alongside subdued profitability metrics. While the company shows promising long-term sales and profit growth and enjoys strong institutional backing, these positives have so far been overshadowed by financial risks and underperformance relative to the broader market. Investors are likely weighing these factors carefully, resulting in the stock’s continued downward trajectory.

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