Q4FY23 Review: Torrent Power: Good operating performance

31 May 2023 , 11:09 AM

In Q4FY23, Torrent Power (TPW) saw pickup in demand across circles, contained AT&C losses, and operated with 35% YoY higher RE capacity — which offset lower LNG trading gains — leading to 10% YoY growth in PAT. Ex-LNG gains, FY23 OCF/ROCE was ~Rs36bn/ ~15%. Cashflows are being reinvested to grow distribution and RE, for which analysts of IIFL Capital Services see 11% p.a. PAT (ex-LNG) growth through FY23-25.

Good operating performance: 

TPW’s Q4FY23 PAT, pre one-off hit was up 10% YoY (DGen impairment in Q4FY22 led to loss). Ebitda growth in distribution/franchising/RE was 25%/41%/36% YoY respectively; IPP Ebitda fell 27% YoY for lower LNG trading gains. Power demand across segments was up 3-18% YoY, accompanied by reduction in AT&C losses. It earned Rs1/1.4bn PBT in Q4/FY23 at DNH circle, well ahead of forecasts (efficiency gains) that was the quarter’s highlight. Despite 35% YoY growth in capacity (~1GW), muted RE PLFs contained growth in Ebitda.

Distribution, RE to drive growth: 

During the earnings call, TPW CFO stated: 1) Rs18-20bn p.a. investment is planned in distribution to meet demand and infra augmentation, including DNH and franchising. 2) 715MW RE capacity would progressively commission through Q1FY24/FY25 (70% growth) entailing Rs50bn capex. IRRs should be ~12%, as outlook on setup costs is much more benign. 3) The respective ERCs are evaluating proposals for parallel distribution licenses (applied at Thane, Palghar, Pune, etc.) and some clarity is likely over next couple of quarters. 4) For gas power plants, it has tied up ~50% of gas; balance quantity would be tied up with favourable pricing curve. 5) It has bid for SKS’s 600MW coal plant at NCLT; would continue to explore such M&A opportunities given the need to source base load power at all of its distribution circles.

Maintain forecasts; ADD: 

A large chunk of TPW’s regulatory assets (Rs19bn vs Rs13bn YoY) are on account of fuel costs, which it recovers through fuel surcharge. Non-recurring LNG trading gains have boosted FY23 PAT, for which earnings growth appears to be muted. However, the underlying momentum is strong with OCF forecast of Rs40-43bn and bestin-class ROCE (15%-16%). Valuations are at premium to other utilities, given distribution-heavy earnings, cashflows etc. analysts of IIFL Capital Services think any material fall in stock price is a great entry point. ADD.