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Low LNG prices keep UnoSugen up and running

Strong positioning, healthy balance sheet; Maintain Buy

We met Torrent Power (TPW) to get an update on the business outlook. Key takeaways: Plan to increase gas sourcing mix toward spot

* TPW has not tied-up new gas supplies for its UnoSugen PPA (effective from 1st Jul’19). Instead, the company is (a) making use of gas tied up for Sugen (@USD6.5/mmbtu till Dec’20) and (b) buying from spot, as required.

* While the Unosugen PPA has a ceiling on the cost of supply (INR5.6/kWh), current spot contract prices provide significant cushion (Exhibit 2).

* TPW believes that the natural gas market would remain oversupplied, and thus it would increase sourcing from spot contracts. Longer-term contracts (generally up to 1.5 years) could be entered, but pricing is done with reference to Brent (slope of ~10-11%) and resulting in higher cost. According to our oil & gas sector analyst, the glut in global gas supply is likely to continue, given (a) increasing gas supply from the US and Qatar and (2) plateauing consumption in China along with possible lower imports from Japan.

* TPW has also contracted storage-cum-regasification capacity of 1mtpa at Petronet LNG’s Dahej terminal for its imports. We note there is capacity in place to increase offtake, if required. Of the 17.5mtpa capacity at the Dahej terminal, only ~15.8 mtpa is contracted. Besides, another 5mtpa of capacity is scheduled to come up in Mundra.

* On the domestic front, TPW has participated in domestic gas allocation from the KG-D6 basin and won supply for 0.25mmscmd.

* Lower spot prices, along with sufficient tie-ups of gas contracts, provide visibility for UnoSugen PPA. We note at current spot prices, cost of generation is ~INR3.6/kWh versus max. fuel cost of INR4.5 (w/o impacting F/C recoveries). Not participating in new renewable projects

* TPW’s recent renewable projects have faced issues:

(1) SECI-III (500MW) was impacted by weak finances of an EPC contractor, land issues and is now past the original COD.

(2) SECI-V (115MW) has faced issues of land procurement. (3) SECI-I project has been downsized to 50MW (from original 150MW).

* Such projects though are cushioned by bank guarantees. The company has encashed INR4b of guarantees for SECI-III given the delay. Further, INR1.8b of investments made in SECI-I have been received back.

* The company’s SECI-III and SECI-V projects though have not been terminated. TPW has asked for an extension in timelines. Progress on SECI-III would depend on the extension in timelines and a credible plan from the EPC contractor/cost dynamics for appointing a new contractor

* Accordingly, TPW awaits clarity on these projects and is focused on executing its current portfolio before further renewable expansion. The company’s MSEDCL project (126MW) is on track and expected to commission in FY20. Given the liquidity release (BG revoked, back down of SECI-I), TPW is funding this project through its accruals.

Looking at T&D; strong positioning, healthy balance sheet are positives

.* TPW has participated in TBCB projects within transmission. However, the company is yet to win awards and believes competitors have been aggressive in bidding. From a distribution standpoint, the company does see possible opportunities within Madhya Pradesh, Rajasthan and Orissa, and will look to participate as and when they crop up. We believe TPW remains well poised to capitalize on opportunities from distribution privatization.

* Outlook for TPW’s gas plants has improved with low LNG prices, sourcing of imported LNG and the offtake of UnoSugen PPA. This, along with continued capitalization within regulated distribution, AT&C loss reduction in franchise business and debt repayment, would drive earnings CAGR of 19% over FY19-22. We maintain our Buy rating with a target price of INR346/share.

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