Q2FY24 Review: Torrent Power: Discom driven growth

10 Nov 2023 , 10:48 AM

Analysts of IIFL Capital Services upgrade Torrent Power (TPW) FY24-26 PAT by 3-5% to reflect H1 performance + improved outlook on gas IPPs; there is scope for further upgrade if weakness in LNG sustains. The Q2FY24 PAT was up 9% YoY, as ramp up in RE capacity and distribution segments offset lower LNG trading gains in IPPs. The best-in-class return ratios, FCF, and governance warrant a premium in valuations. Analysts of IIFL Capital Services retain their positive stance. 

Discom-led growth:

TPW’s Q2FY24 PAT growth of 9%, was led more by distribution, and supported by a scale up in RE capacity, as LNG trading gains taped down. In Q2FY24, TPW’s distribution business (franchising + license) reported Ebitda growth of 20% YoY, which was driven by demand growth, reduction in T&D losses, etc; its RE capacity was up 17% YoY and translated to a 33% YoY Ebitda growth; the IPPs, however, reported 41% YoY fall in Ebitda, even though the merchant sales were up YoY (LNG trading gains fell). Share of IPP/distribution/RE in Ebitda was 18%/57%/25% vs 32%/48%/20% YoY. In Q2FY24, OCF/Ebitda conversion was 84% vs 34% YoY. 

Balanced growth approach: 

During the earnings call, TPW stated -1) As visibility on power demand is strong, the visibility of turnaround at DGen (stranded IPP) has improved; in H1, it has reported profits; 2) power demand in its circles is led by residential as well as industrial segments, and should remain healthy as economic activity gathers momentum; 3) RE is a focus area, but, capacity scale up would not be at cost of cash flows and returns; it is focussing on C&I and hybrid projects where CUF is higher and can fetch higher returns; 4) preliminary work is progressing on PSH projects, and the timelines for their completion are 4-5 years away. 

Upgrade earnings:

To reflect H1 performance and improved demand outlook, analysts of IIFL Capital Services upgrade FY24/26 PAT by 3-5%, and see further upside, if gas prices are benign. The FCF (Yield 6-7%), return rations (RoE >16%) and balance sheet are best-in-class, for which the premium to other utilities is justified. As such, the stock remains analysts of IIFL Capital Services preferred allocation in the sector.