Reiterate ADD on Torrent Power - Improved result; earnings visibility intact - HDFC Securities

Mr. Anuj Upadhyay, Institutional Research Analyst, HDFC Securities

Torrent Power (TPW) reported consolidated revenue at INR 30.8bn (+3.4%/+4.4% YoY/QoQ) in Q4FY21. Power demand increased by 11% YoY (13% across license area and 7% across franchisee circles), led by revival in economic activity. EBITDA improved 11% YoY to INR21.7bn on the back of improved AT&C losses and fall in O&M expenses. Deleveraging along with fall in interest rates have led to a fall in interest expenses. After adjusting for one-offs and prior period elements, adjusted PAT increased by 4% YoY to INR3.1bn in Q4FY21. We have revised our SoTP target price to INR476 (+6% from CMP) by assigning higher multiples across the segment to factor in improved net D/E ratio to 0.6x in FY21 vs 0.8x YoY and a sustainable FCFE of ~INR10bn p.a. The management has also changed its dividend policy to factor in a higher payout of 40% vs 30% earlier. Hence, we reiterate our ADD rating on TPW.

Power demand witnessed steep rise on low base: Power demand increased by 11% YoY (13% across license area and 7% across franchisee circles), led by revival in economic activity and low base (YoY), given the lockdown. Revenue grew by (+3.4%/+4.4% YoY/QoQ) to INR30.8bn, led by improved demand and rise in generation across the SUGEN (+18.2%) and AGEN (+25.1), while generation from the wind segment declined -12.5% YoY. EBITDA increased 10.6% YoY to INR9.1bn (+5.1% QoQ), led by 41% YoY fall in other expenses. The company's deleveraging combined with the fall in interest rates led to a 26.4% YoY fall in interest cost to INR1.6bn in Q4FY21. Accordingly, TPW reported a PAT of INR4.0bn vs a loss of INR2.7bn YoY (largely due to impairment of Rs10bn towards the DGEN plant). However, after adjusting for the one-offs and prior period items, APAT increased 4% YoY to INR3.2bn. TPW provided a dividend of INR11/share in FY21.

FCFE to remain strong: Long term debt for TPW fell to INR66.7bn as of Mar'21 from INR78bn in the previous year. Accordingly, its net D/E declined to 0.6x in FY21 vs 0.8x YoY while net debt/EBITDA declined to 1.8x in FY21 vs 1.9x YoY, which is amongst the strongest in the industry. While the company will incur a Capex of ~INR21bn-22bn for FY22 (license business - INR10bn, franchisee - INR2bn, Solar - INR8.5bn), it would still generate an FCFE of INR10bn, led by its strong operating cash flow of INR36bn.

Reiterate ADD: We have revised our SoTP target price to INR476 (from INR439) by assigning a higher multiples across the segment to factor in improved net D/E, stable cash flows, better earnings from improved T&D losses, and higher dividend payout. We expect TPW's RoE to improve to 15.5% by FY23 from 13.4% in FY21. Hence, we reiterate ADD.

Shares of TORRENT POWER LTD. was last trading in BSE at Rs.439 as compared to the previous close of Rs. 450.5. The total number of shares traded during the day was 54166 in over 1588 trades.

The stock hit an intraday high of Rs. 459.15 and intraday low of 437.3. The net turnover during the day was Rs. 24010287.

Source : Equity Bulls

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