Torrent Power - On the path to recovery - ICICI Securities

Major factors impacting Torrent Power's (TPW) Q2FY21 performance include - provision of Rs1.2bn taken for DF businesses, lower merchant prices, lower generation (both conventional and RE), demand reduction at DFs, higher AT&C losses, and decline in interest cost. On consolidated basis, adjusted profit for the quarter was Rs3bn, down 31.2% YoY, while reported profit was Rs2bn, down 73% YoY. Consolidated revenue/EBITDA was Rs31.3bn/ Rs7.1bn, down 18.6%/32.6%. SUGEN PLF was higher at 69.6% (vs 64.4% in Q2FY20) but overall conventional generation declined 8% YoY led by AMGEN (down 53% YoY). Lower interest rates and decline in debt on QoQ basis (but higher YoY) resulted in reduction in interest costs by 19% YoY. We upgrade TPW from reduce to HOLD but maintain the target price of Rs313.

- Wind generation higher, conventional lower: Overall generation fell 7% YoY mainly due to lower generation at AMGEN (-53% YoY), UNOSUGEN (-8% YoY), and lower RE generation (-6.6% YoY) as wind (-8% YoY) was impacted due to low wind speeds, although generation at DGEN (26% YoY) and SUGEN (8% YoY) increased.

- Improvement in distribution businesses' performance: Although demand was low for DL businesses, they posted 6% higher EBITDA YoY at Rs3.5bn. But EBITDA for DF businesses in Q2FY21 came in lower at Rs1.5bn vs Rs2.5bn in Q2FY20 (SMK DF contributed negatively). Although overall demand is lower by 16% YoY in Q2FY21, it has improved for all areas in Oct'20, with Bhiwandi lower only 2% YoY. For Bhiwandi and Agra, during H1FY21, collection efficiency was at 96% (99-100% in Q2FY21) and 90% (95-96% in Q2FY21), respectively. It has almost recovered to 100% in both the areas now. For FY21, management has guided for loss levels lower than normative for DL areas but higher for DF areas (to reach normative levels only by Q4FY21). TPW has done capex of ~Rs3.5bn in H1FY21 (Rs2.7bn/Rs800mn in DL/DF). The company made a further provision of Rs1.21bn (pre-tax) for DF business (similar quantum for all three areas), which is in addition to Rs480mn taken in Q4FY20, but it expects to recover a significant amount in the next 12 months. TPW doesn't expect any further provisioning.

- Merchant prices will remain a challenge: Although merchant sales were higher at 480MU vs 395MU in Q2FY20, net contribution was lower at Rs0.24/kWh vs Rs0.72/kWh in Q2FY20. We expect merchant prices, which continue to be subdued at the exchange, will remain a challenge going forward. Also, although TPW has booked gas cargos for its requirement (at ~$4/MMBtu) until Nov'21, if gas prices increase and merchant prices continue to remain tepid, TPW's merchant realisation may decline further in FY22.

- Debt levels return to Mar'20 levels as assured: Gross debt as of Q2FY21-end declined to Rs86bn from Q1FY21 level of Rs93bn, going below FY20-end figure of Rs87bn as was assured by TPW earlier. The company has Rs10bn cash and cash equivalents in hand. Debt to equity at the end of H1FY21 stood at 0.89x.

- Valuation: We upgrade our rating on TPW from reduce to HOLD due to the stock's price movement but maintain our target price of Rs313 despite strong long-term fundamentals as it trades at a premium to peers and increasing gas pricing remains a medium-term concern. However, improving demand numbers allay some fears.

Shares of TORRENT POWER LTD. was last trading in BSE at Rs.305.15 as compared to the previous close of Rs. 302.9. The total number of shares traded during the day was 3622 in over 157 trades.

The stock hit an intraday high of Rs. 307.15 and intraday low of 303.8. The net turnover during the day was Rs. 1105633.

Source : Equity Bulls

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