Torrent Power: On a well charted growth path

8 Aug 2023 , 10:15 AM

Recommendation: Add; Target price: Rs 700

 

Torrent Power (TPW) FY23 Integrated AR gives a good update on the performance of each of the businesses and growth plans. TPW continues to generate healthy cash flows and best-in-class return ratios and yet have one of the lowest Debt/capital. Distribution and RE are growth engines with a constant lookout for opportunistic M&A. The 9% p.a. distribution and RE led PAT growth through FY26 has high visibility for which valuation multiples may remain at a premium. 

Well charted growth path: 

TPW’s FY23 integrated AR gives a good disclosure on the performance of its generation and distribution portfolio. Its ESG disclosures are one of the best. The AR highlights the growth drivers of the company going ahead (RE+T&D). The company aims to reach 5GW capacity over the next 5 years by participating in utility-scale projects and expanding its C&I portfolio. It will expand its distribution network through participation in privatisation/ franchising/ parallel license bids for new areas. On the transmission front, it plans to selectively participate in new transmission projects (over 18 months). Further, the AR highlights the means for achieving its targets as well. 

Good performance across segments: 

TPW’s Ebitda/PAT has grown by 10%/24% p.a. through FY19-23 led by all business verticals. While earnings growth from Gas IPPs was largely led by LNG trading gains, growth in RE and distribution was led by capacity additions (457MW + ~915MW U/C) and a reduction in AT&C losses. Consequently, CWIP has risen to 11% of total assets (2% in FY19). Dividend pay-outs have improved from 27% in FY19 to 59% in FY23 given its prudent capital allocation practices. 

Steady earnings growth: 

Analysts of IIFL Capital Services forecast TPW’s earnings to register 9% p.a. through FY24-26 led by RE and distribution. FY24 vs FY23 sees a decline in PAT due to LNG trading gains in the base. FY24-26i OCF is estimated at Rs38-46bn which is well ahead of capex and to that extent balance sheet stays healthy and underleveraged (ND/E – 0.7x). Return ratios are best-in-class (~15.5% RoE) and coupled with good governance (no ICDs with group entities, prudent capital allocation, high pay-out ratio, etc.) and strong cash flows, valuations at a premium to other utilities (16.4x FY25 P/E) are justified. Maintain ADD.