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UNOSUGEN tariff finally approved!
In an order issued by the Gujarat Electricity Regulatory Commission (GERC), tariff on power from the 382.5MW brownfield gas project, UNOSUGEN, which was determined by CERC in FY14, has been finally adopted, albeit with certain changes. As against a fixed cost of Rs34.7bn (Rs1.68/unit) as in FY19, Torrent Power (TPW) has offered recovery of Rs2.3bn (Rs1.1/unit) prospectively, hence foregoing the fixed cost recovery till date. Assuming this recovery and adjusting higher O&M costs, we upgrade our EPS estimates by 8.9/10.8% for FY20/FY21 and increase our target price to Rs327/sh from Rs295. However, due to the recent runup in stock price, we downgrade our rating to ADD; nevertheless, we remain positive on the company in the long term as it is one of the biggest beneficiaries of distribution reforms.
* ‘The offer’: UNOSUGEN, the brownfield expansion of the SUGEN plant, had signed up 278MW of its 382.5MW capacity with Distribution License (TPL-D) and the tariff on the same had been approved by CERC on a cost plus 15.5% RoE basis. However, the tariff adoption was pending since FY14 at GERC, which has now been approved. Brief contours of the approval are: o Rs2.3bn will be recovered annually as fixed charge vs Rs3.4bn determined by CERC (Rs1.1/unit vs Rs1.68/unit as per CERC at 85% PLF). TPW has already taken a hit of Rs20.7bn fixed charges from CoD to 31st Mar’19. o The tariff as above will be applicable for a limited period of 19 years vs 25 years of the PPA. o PPA has been approved with the condition that TPW shall enter into FSAs with fuel suppliers by inviting international competitive bids and ensuring that the landed price of power purchase (including the fixed charges for consumers) should not exceed the prevailing landed market price for medium term power purchase during a given period.
* The justification: The rationale for this approval given are: 1) only 69% of peak demand has been tied up in long-term contracts; 2) environmental costs have made alternative conventional fuels as expensive if not more; 3) alternative bids called recently were expensive (Rs5.47-5.88/unit); and 4) Contribution from gas plants is needed for grid stabilisation with increased renewable penetration.
* Downgrade to ADD despite strong fundamentals on recent stock run up: We upgrade our EPS estimate for FY20/FY21 by 8.9/10.8% and increase our SoTPbased target price to Rs327/sh. However, we downgrade the stock to ADD from Buy on account of the 27% run-up in the stock price since 24th Jun’19. While it is critical that imported gas prices remain subdued so that variable charges remain competitive, we believe TPW will be able to recover availability-based fixed charges. We continue to remain positive on the stock as we estimate 20% CAGR in earnings over FY20-FY21.
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