Torrent Power - Intent of growth visible - ICICI Securities

Higher RE generation, return to demand normalcy in all distribution areas, reduction in AT&C losses and decline in interest cost were the major factors positively impacting Torrent Power's (TPW) Q3FY21 performance. On consolidated basis, revenues were down 4.1% at Rs29.5bn while EBITDA was up 3.6% YoY at Rs8.7bn, mainly due to fuel cost savings (TPW had booked low-cost gas cargoes a few quarters back). Reported PAT was down 23.6% YoY at Rs3.2bn, but adjusted PAT was 12.9% higher YoY at Rs2.9bn. RE generation was up 34% YoY, but conventional generation declined 5.2% YoY. Company has renewed its growth interests with a 100MW solar project win in Gujarat and 300MW in Andhra Pradesh, and has placed bids for licensed distribution in two Union Territories. We upgrade TPW from Reduce to HOLD and increase our target price to Rs334 (earlier: Rs313) as we roll over to FY23E. We are keenly watching its progress in bids and potential value accretion.

- Wind generation higher, conventional lower: Wind generation improved 42% YoY due to capacity addition in FY20. Solar generation was higher by 4% YoY. Conventional generation declined by 5.2% YoY: AMGEN (-9% YoY) and SUGEN (-7%), good generation at UNOSUGEN (up 4% YoY).

- Improvement in distribution businesses' performance: Demand in the distribution businesses normalised, resulting in flat EBITDA growth YoY at Rs3.3bn for distribution licensee (DL) business and Rs2bn for distribution franchisee (DF) business. Till Q2FY21, TPW had made a provision of Rs1.4bn for bad debt at DFs, but in Q3FY21 it recovered Rs310mn. It expects to recover a significant amount in the coming quarters as well.

- Dividend announced: TPW continues to maintain its dividend policy of 30% of PAT. It has announced Rs5.5/share as interim dividend for FY21.

- Gas costs currently under control, but high prices remain a concern: Benefit of lower-cost gas contracts helped TPW reduce its fuel expenses (average cost of gas was US$5-5.5/mmbtu in Q3FY21). TPW has tied-up its gas requirements up to Dec'21 at ~US$4/mmbtu, but this caters to ~75% of its annual requirements. As gas prices have increased significantly, TPW's merchant sales margins may be affected.

- Debt reduces further; capex steady: Gross debt as at Q3FY21-end was down by Rs2bn QoQ to Rs84bn. TPW has Rs10bn cash in hand. Capex for 9MFY21 is ~Rs7.8bn. Since FY21E capex may only be Rs11bn-12bn (~Rs9bn for DL and ~Rs2bn-2.5bn for DF), the balance Rs3bn-4bn will spill over to FY22 (beyond the Rs15bn planned).

- Growth back on the agenda: Company is keen on growth in two segments - solar and T&D. It has bid for DL in two UTs - Dadra & Nagar Haveli and Daman & Diu, and Chandigarh. It has also won a 100MW project in the GUVNL bid at a record low tariff of Rs1.99/kWh and is L1 for 300MW solar bid in Andhra Pradesh (currently subjudice). Upcoming opportunities include own discom RPO (300MW) and solar bids in Madhya Pradesh and Rajasthan.

- Valuation: We upgrade our rating from Reduce to HOLD and increase our target price to Rs334 (earlier: Rs313), as we roll over to FY23E. We also increase our estimates for FY21E/FY22E, as we build-in the better than expected demand recovery at DFs.

Shares of TORRENT POWER LTD. was last trading in BSE at Rs.328.45 as compared to the previous close of Rs. 333.8. The total number of shares traded during the day was 27831 in over 553 trades.

The stock hit an intraday high of Rs. 336.95 and intraday low of 326. The net turnover during the day was Rs. 9216305.

Source : Equity Bulls

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