Q3FY24 Review: Torrent Power: Distribution grows, as trading gains don’t

12 Feb 2024 , 01:11 PM

Torrent Power (TPW) did not earn any meaningful LNG trading gains as seen a year ago (Rs4bn), for which consolidated PAT fell 47% YoY; its distribution and RE business Ebitda grew 12%/17% YoY respectively on back of demand growth, AT&C loss reduction, and capacity adds. Weakness in LNG prices can potentially swing its stranded 1.2GW gas based unit; further falling module prices can materially swing economics of its upcoming RE units (5GW targeted in next 3-4 years). Analysts of IIFL Capital Services maintain 11% pa earnings growth through FY24-26 and see TPW as a key portfolio holding in the sector. 

Good performance:

TPW in Q3FY23 had booked LNG trading gains of Rs4bn in the IPP segment, which did not repeat in Q3FY24, for which its Ebitda fell ~68% YoY, and dragged consolidated PAT by 47% YoY. It sold 6% YoY higher power at 7 of its distribution circles, and also lowered AT&C losses, for which the Ebitda was up 12% YoY; RE segment also witnessed 17% YoY growth in Ebitda, on the back of 12% YoY higher capacity. The treasury income was down 36% YoY (investment in projects), while, depreciation grew 8% YoY. Share of IPP/RE/distribution in consolidated Ebitda was 21%/17%/62% respectively vs 47%/10%/43% YoY. 

Focus on discom + RE:

During the post earnings call, TPW stated that – 1) it has booked 2 new LNG cargos at favorable prices; this should bode well for an uptick in its 2.7GW gas based capacity, currently operating at 18% PLF; 2) outlook on power demand is positive, for which it would sustain its capex plans of Rs15bn pa in its distribution business for next few years; 3) it is on track to expand its RE capacity to 5GW over the next 3-4 years (1.2GW now); its cost of funding remains competitive, and falling module prices bode well for the project economics; in base case it targets to earn mid-teen IRRs, which has scope to improve if it manages to renegotiate modules prices at better terms; 4) it will continue to explore opportunities to grow business inorganically and sees opportunities across the chain. 

Upside to earnings; ADD: 

Analysts of IIFL Capital Services FY24-26 consolidated PAT growth of 11% p.a., has upsides if weakness in LNG prices and power demand sustains; the near term valuations are not cheap; for meaningful upside, however, one can await better entry point as analysts of IIFL Capital Services like TPW’s capital allocation strategy, sector beating return ratios and best in class governance standards, for which stock deservingly trades at a premium to other utilities.