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Distribution outperforms; gas uncertainty continues

Torrent Power’s (TPW) Q4FY22 numbers were boosted by good performance of the distribution businesses, which saw substantial loss-reduction while power demand reverted to pre-covid levels, and one-time gains. On consolidated basis, revenues were up 21.4% YoY to Rs37.4bn and EBITDA up 8.3% YoY to Rs9.9bn. While TPW reported a loss of Rs4.9bn due to impairment of Rs13bn provided for DGEN, adjusting for one-offs in both Q4FY22 & Q4FY21, adj. PAT was flat YoY at Rs3.5bn, while adj. PBT was up 19% YoY at Rs4.8bn. We believe growth over the next two years will be driven by the distribution businesses with further reduction in AT&C losses, and commissioning RE capacities, although medium-term growth may be sluggish since TPW's participation in RE auctions is limited. Recent acquisitions of RE assets and licensed distribution for Dadra and Nagar Haveli & Daman and Diu is positive. Upgrade to ADD (from Sell).

Q4FY22 PBT was impacted by: 1) Reversal of Rs150mn of provision for doubtful debt at DFs, 2) Rs280mn partial reversal of provision for SECI-3 project, 3) Reversal of partial provision of Rs290mn for SECI 5 projects, 4) Rs340mn was received as liquidated damages for 126MW MSEDCL project as settlement with EPC contractor, 5) Rs110mn on account of acquisitions of RE projects. Thus, Q4FY22 adj. PBT was up 19% YoY at Rs4.8bn, YoY gain of Rs750mn, comprising of: 1) Rs400mn gain from LNG trading, 2) Rs150mn loss due to lower incentives for gas plants, 3) Rs570mn gain due to higher contribution of distribution business, 4) Rs130mn gain due to reduction in finance cost. TPW booked impairment loss of Rs13bn for DGEN (Rs9.3bn net of def. tax reversal). As a result, reported cons. loss was Rs4.9bn but adj. PAT was flat YoY at Rs3.5bn.

Distribution businesses outperformed but generation declined: On YoY basis, T&D losses at Ahmedabad/Surat were 186bps/68bps lower, aiding higher incentives. AT&C losses at Bhiwandi/Agra/SMK declined 458bps/140bps/441bps YoY. Generation at AMGEN (619MU, +31%) was higher, but at gas stations was lower - UNOSUGEN (0, vs 543MU in Q4FY21), SUGEN (506MU, -58% YoY), DGEN (0) – resulting in decline in SHR savings. Wind generation declined 6% YoY at 295MUs but solar was flat at 58MUs

Lower generation to continue due to elevated gas prices: For CY22, only one LNG cargo has been contracted at $20/mmbtu recently while existing tie ups meet 25% of gas requirements. While 75% requirement for CY22 is yet to be tied-up, for CY23-26, 50% requirement has been tied-up, as the company secured 34 cargoes for the period. TPW had contracted power on short term basis for its DL areas to cater to the higher demand. TPW management does not expect any fixed-cost under-recovery as it will keep its gas plants available irrespective of gas prices (allowed as per Section 62 of the Electricity Act).

Upgrade to ADD: We increase our SoTP-based target price to Rs488 (earlier: Rs470) and upgrade TPW from Sell to ADD, incorporating newly acquired operational RE assets, better-than-expected AT&C loss reduction at DFs, and UNOSUGEN fixed cost pass through. While we believe growth over the next two years will be driven by distribution businesses due to further reduction in T&D losses, and addition of RE capacities, mediumterm growth may be sluggish. In FY22, TPW acquired 231MW of operational RE capacities while currently 515MW is under construction to be commissioned over the next 12 months (contingent upon module prices). Visibility beyond the current RE pipeline is subject to TPW’s participation in auctions in the near term.

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