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Distribution business recovering

Price capturing in a demand recovery; reiterate Neutral

* TPW’s result highlights the benefit of better demand and lower T&D losses in its distribution franchise (DF) business, leading to a 7%/43% YoY jump in adjusted EBITDA/PAT. However, the numbers were a miss on our estimates.

* While the second COVID wave has delayed the normalization of demand and collections at DFs, we expect TPW’s DF business to improve in FY22E/FY23E. However, this remains well captured at the current price. We reiterate our Neutral rating with a TP of INR485/share.

Adjusted profit to improve on a recovery in distribution and lower interest costs

* Adjusted EBITDA was up 7% YoY to INR7.5b (est. INR8.1b) in 1QFY22. The miss on our numbers was due to: a) lower than expected improvement in DF, and b) lesser profitability for its gas-based generation.

* Demand for its DF business was up 38% YoY. However, it remains 13% below pre-COVID levels. T&D losses at Bhiwandi fell to 11.6% (v/s 24.5% in 1QFY21), while for Agra it stood at 17.4% (v/s 22.8% in 1QFY21). EBITDA for its DFs rose to INR1.7b v/s INR0.4b in FY21. Collections of arrears have been deferred, given the impact of the second COVID wave.

* EBITDA for gas-based generation was lower at INR1.3b v/s INR2b in FY21 due to lower merchant sales, higher O&M expense, and lowering of Sugen PPA by 25MW.

* Renewable generation declined by 3% YoY to 459MUs. EBITDA for the Renewables segment was slightly lower at INR1.75b v/s INR1.85b in FY21.

* Interest costs fell 26% YoY to INR1.6b on the back of lower debt and borrowing costs.

* Adjusted PAT was up 43% YoY at INR2.2b (est. INR2.6b). At the reported level, PAT fell 45% YoY to INR2.1b.

Key takeaways from the management interaction

* TPW expects demand at its distribution franchise business to reach preCOVID levels by the end of FY22. Around INR1.3b of excess provisioning has been created, of which 50% pertains to the Shil, Mumbra, and Kalwa (SMK) circle. Recovery of the same from SMK may take some time, but the balance should be recovered in the next three quarters.

* Around 70% of its gas requirements for FY22 have been tied up at USD4.36/mmbtu. The company does not see current gas prices as sustainable, and hence has not made any future bookings. The management plans to contract for FY23 as well.

* It is looking at reviving the 115MW SECI-V project for which the timeline has been extended to Feb’22. The company has the necessary permissions in place and is in the process of acquiring land.

Current price bake in a demand recovery; maintain Neutral

* While the second COVID wave has delayed normalization of demand and collections at its DFs, we expect the company’s distribution franchise business to improve in FY22E/FY23E. This, along with continued capex in the regulated distribution business and lower interest costs, should result in 21% PAT CAGR over FY21-23E. With the run-up in the stock over the past six months (+47%), this is well captured.

* With a healthy Balance Sheet, TPW is still well poised to capitalize on opportunities from privatization in the distribution space. We await clarity on successful wins. We maintain our Neutral rating with a SoTP-based TP of INR485/share.

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