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Operational effectiveness to craft future...

Torrent Power Ltd. (TPL) is one of the leading power utility companies in India, with functions across generation, transmission, and distribution. It has operations spread across Gujarat, Maharashtra, UP, and Karnataka.

* The distribution businesses foresee increased productivity as a result of decreased T&D losses and expansion ambitions to boost the top line.

* By FY25, we anticipate a 28% rise in renewable capacity, spurred by capacity augmentation.

* With the expected drop in gas prices, we believe that the gas plants’ efficiency will improve, resulting in increased profitability.

* The company is expected to maintain a debt/equity ratio of 0.7x in FY25, down from 0.9x in FY23, and an ROE of 16% in FY25.

* We initiate TPL with an Accumulate rating and a target price of Rs. 550 based on a multiple of 1.62x FY25 P/Bk, considering its healthy balance sheet, solid performance in distribution circles, and the expectation that the PLFs of the generating units would pick up.

Revenue growth to stay intact..

TPL maintained a healthy operational performance, which was contributed by the addition of new licensed area, low AT&C losses, higher demand, and improved collections across distribution areas. This boosted revenue in 9MFY23, reported at Rs.19,656cr, showed a growth of 87% when compared to 9MFY22 of Rs.10,514cr. This is mainly due to a 63% increase in the sale of units in the distribution areas. The margins, however, declined to 18.7% from 24.7% during the period due to low fuel-based incentives and impairment charges at the DGEN plant. Going forward, we expect the positives to stay intact and the revenue to grow by ~5% CAGR for the period FY23-25, owing to the high base set during the 9-month period of FY23.

Being ready to spur growth…

By reducing losses through smart metering and maintaining strict supervision in the distribution areas, TPL has been able to manage its distribution segments effectively. The renewable segment is expected to increase the Plant Load Factor (PLF), which would aid in better profitability for the segment. As a result of rising gas prices, the efficiency of gas generation plants has suffered significantly. TPL makes a tactical decision to sell gas or generate power and earns revenue as a result. We anticipate that the efficiency of the gas plants will improve as gas prices normalise.

Expansion plans...

Torrent Power Ltd. has plans to expand its renewable assets with a total capacity of 715 MW, which consists of 300MW of solar and 415 MW of wind. Additionally, a potential acquisition of the distribution areas of Nagpur and adjoining areas is under discussion.

Valuation

Given its healthy balance sheet and robust performance from its licensed and franchised distribution segments, along with improvements in PLF for both generation segments, we anticipate the company’s earnings to improve. As a result, we initiate with an Accumulate rating on the stock and value it at 1.62x FY25 P/Bk with a target price of Rs. 550.

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