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Distribution business normalizes

Price captures demand recovery; downgrade to Neutral

* Torrent Power (TPW)’s result highlights the benefit of normalizing demand in its Distribution Franchise (DF) business, offset by lower renewable generation. Reported EBITDA was up 11% YoY.

* While a fresh set of lockdowns could affect the performance of DFs, power demand and collections in DFs have not been significantly impacted thus far. We expect the co.’s DF business to improve over FY22–23. However, with the recent run-up in the stock (+45% in the last six months), this improvement is well baked in. Accordingly, we downgrade to Neutral, with TP of INR480/sh.

Distribution biz normalizes; lower interest costs kick in

* TPW’s 4QFY21 reported EBITDA was up 11% YoY to INR9.1b. However, oneoffs such as 1) an INR130m benefit from the reversal of provisions for doubtful debts and 2) INR380m in fuel cost recoveries in UnoSugen were observed. Adjusted for these, EBITDA would be at INR 8.6b (est. INR9.0b).

* The quarter also saw INR0.5b income related to RLNG trading, offset by lower renewable generation.

* Renewable generation declined 11% YoY at 372Mus, weighed by lower wind plant load factors (PLFs) – wind PLFs stood at 20.8% for the quarter v/s 22.7% in 4QFY20.

* Power purchase at Bhiwandi/Agra was up 7%/8% YoY and has now largely normalized. FY21 T&D loss at Bhiwandi came in lower at 16.2% (19.1% in 9MFY21). T&D loss at Agra was 13.5% v/s 13.2% in 9M.

* Interest costs were down 14% QoQ / 26% YoY to INR1.6b (est. INR1.9b) on the back of lower debt and borrowing costs (150 bps lower YoY). Adj. PAT was up 27% YoY to INR3.6b (est. INR3.2b). Reported PAT stood at INR4.0b v/s loss of INR2.8b in the previous year. The previous year saw an impairment of INR10b for DGEN. FY21 adjusted profits were down 18% YoY to INR11b.

Management commentary highlights

* Demand from end consumers has recovered, with demand in Distribution License (DL) and DF up just 14% and 7% YoY, respectively, in 4Q. The co. noted some reduction in demand at Bhiwandi in April and May due to the lockdown in Maharashtra – however, this is insignificant.

* Collections in its DFs circles remain good at >100%. The co expects to recover most of the balance of INR1b provisions made in the coming quarters.

* Capex within the DL and DF circles would continue at INR12b p.a. and INR2.5b p.a., respectively. Capex for under-construction renewable projects stands at INR16b. 50–60% of renewables-related capex is expected in FY22.

Current price bakes in demand recovery; downgrade to Neutral

* A fresh set of lockdowns could affect the performance of DFs. However, power demand and collections in DFs have not been significantly impacted thus far (as per company announcements). Besides, collections in these circles remain strong. We expect the co.’s DF business to improve over FY22–23. This, coupled with continued capex in the regulated Distribution business and lower interest costs, should result in a 24% PAT CAGR over FY21–23. However, with the recent run-up in the stock (+45% in the past six months), this is well-captured.

* With a healthy balance sheet, TPW is still well-placed to capitalize on opportunities arising from distribution privatization. However, we await clarity on successful wins. Accordingly, we downgrade to Neutral, with SOTP-based TP of INR480/sh.

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