Torrent Power: Well poised for growth

1 Mar 2023 , 03:07 AM

Recommendation: Add

Target Price: Rs 575

 

Strong business outlook

TPW’s Distribution business (seven areas in all) is on a strong footing. Power demand is well past the pre-COVID levels and set to grow at 5-6% p.a. It is also focusing on improving the quality of service and cutting down the AT&C losses. Moreover, it has applied for parallel distribution licences in Thane, Palghar, Pune, etc., where it plans to foray and set up network. While plans are in the nascent stages, this reflects management’s vision to grow its core business. TPW is mindful of return ratios and cashflows while scaling up the 1.07GW RE business. Its 715MW of pipeline offers good growth visibility, and strong balance sheet places it favorably to acquire stressed assets (already acquired 281MW). Gas IPP portfolio (2.7GW) is unlikely to grow but remains strategic, given the possible reforms in the sector.

Steady earnings growth

TPW has booked Rs8 billion LNG trading gains in FY23, which are opportunistic in nature. Such high base is likely to offset the core business growth driven by capex in Distribution business, AT&C loss reduction and gradual scale-up in RE capacity. The EBITDA / PAT growth exLNG trading through FY23-25 is estimated at 8% / 8% p.a., respectively. Gas prices have collapsed by ~70% from the peak, and TPW may look forward to kick-start its gas-based units for merchant sales; such gains are not factored into IIFL Capital Services’ forecasts. Analysts at IIFL Capital Services also do not build in any upside from the parallel distribution network expansion, where timelines are unclear.

Best in class

IIFL Capital Services’ 7-40% PAT upgrade through FY23-25 is to reflect the YTD performance. Notably, 70% of the earnings (ex-LNG gains) are led by Distribution, and have low risk. Through FY23-25, it will generate FCF of Rs9-16 billion p.a., and report ROCE of 15-16% — best in class. The governance is top notch – reflected in payout ratio, and no RTP (eg: no ICDs to any group entities like gas, financials, healthcare etc despite aggressive growth plans). Further, now the valuations at 13.6x FY24 estimated P/E are reasonable.