Torrent Power - A jewel at bargain prices - Ambit

Poor 1QFY13 results have meant that post-results Torrent's stock price has underperformed the broader market by 11%. However, based on discussions with industry experts, we believe the profit miss in 1Q is only transient given that the fuel price and power adjustment charges (FPPPA) of Rs.1.5bn related to the SUGEN plant not booked as revenues in 1QFY13 will get booked in 2HFY13. We believe this to be the key catalyst to take the stock price to Rs.192 (CMP is Rs.155) which is our fair value of the operational assets.

Competitive position: STRONG Change to this position: NEUTRAL

Why will profitability improve in 2HFY13? Sugen's tariff is availability based and not PLF based. In other words, if the plant remains non-operational purely due to lack of fuel Torrent still can get its capacity charges (fixed charges) recovered from the regulator. It is to be noted that the ROE forms part of capacity charge. Given that the reduction in SUGEN's PLF from 89.7% in 1QFY12 to 59.16% in 1QFY13 is ONLY on account of the fall in the domestic gas supply from the KG Basin, we believe it is just a matter of time that Torrent gets compensated for the lost ROE on Sugen (1Q profit will double if lost ROE is recovered). Note that out of SUGEN's1147mW production, 800mW is sold to Torrent's own distribution circle.

Stock is trading below the fair value of operational assets: We value Torrent's operational assets (which includes the Ahmedabad and Surat generation assets and the Ahmedabad, Gandhinagar and Surat distribution circle), operational other income and value of investments and current assets at Rs.192/share (see details in the SOTP based valuation table on pg 3). We believe the stock will reach this fair value as soon as the company books the additional revenue related to FPPPA. Note that unlike other utilities, Torrent Power has chosen not to book this revenue. Had this revenue been booked the stock would not have corrected by 15% running into the results.

Visibility on the upcoming assets improving: Torrent has already incurred capex of Rs.34bn (which is equivalent to ~50% of the total capex) on its upcoming gas based Unosugen (383mW) and Dahej projects (1,200mW). Furthermore, it also has managed to raise additional debt of Rs.22bn in FY12 on the project despite low visibility on gas and despite banks' reluctance to providing funding to this sector. We believe Torrent Power got funding because ~2/3rd of its projects are already tied up under PPA.

Valuation: Assuming revenue CAGR of 4% over FY11-14, EBITDA margin of 28% between FY11-14 and Cost of Equity of 13%, our DCF values Torrent at Rs.285/share implying 84% upside and FY13 P/BV of 2x. However, on FY13 P/BV, Torrent trades at a 15% discount to Indian peers despite higher return ratios (ROE of 13% as compared to 8% for peers) coupled with a superior execution track record (Torrent's T&D losses at 8% is the lowest in India) and impressive cash generation (FY12 CFO/EBITDA stood at 70%).

Source : Equity Bulls

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