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Torrent acquires CESC’s wind assets – win-win for both

Torrent Power (TPW) has entered into an SPA for 100% acquisition of Surya Vidyut Limited, a wholly-owned subsidiary of CESC. Such transactions are typically good for one and not for the other; however, in this case, it is a win-win for both due to the difference in their strategic intents – TPW wanted to add RE capacity without participating in highly competitive bids, while CESC aims to grow its distribution business and move away from RE generation.

Further, CESC will receive a value which is higher than the one ascribed to these low IRR assets. The EV estimated for this acquisition as per the company is Rs7.9bn, translating into a payout of Rs50.6mn/MW, and 8.2x FY21 EBITDA (6.9x for FY20). With 648.5MW of operational wind assets already in TPW’s portfolio, we believe it will be able to improve the IRR from the current 9-10% to 13-15% through debt refinancing, higher CUF and lower O&M. Maintain BUY for CESC and REDUCE for TPW.

* Details of the transaction: Torrent Power has entered into an SPA for 100% acquisition of Surya Vidyut Limited, a wholly-owned subsidiary of CESC. Enterprise value estimated for this acquisition, as per the company, is Rs7.9bn (of which Rs4.75bn is debt), translating into a payout of Rs50.6mn/MW. The value of the transaction comes out at 8.2x FY21 EBITDA of Rs933mn and 6.9x FY20 EBITDA of Rs1,115mn. CESC will receive an equity value of Rs3.15bn on its investment of Rs2.5bn, which is 1.3x P/BV. The 156MW wind assets were yielding 9-10% IRR for CESC which we believe can improve to 13-15% post the acquisition by Torrent on account of debt refinancing, higher CUF and lower O&M due to synergy benefits.

* Overview of the assets: Surya Vidyut operates four wind power plants with a total capacity of 156MW, spread across Gujarat, Rajasthan and Madhya Pradesh. The plants were commissioned over FY13-18 and have long-term PPAs for 25 years, with weighted average tariff of Rs4.68/kWh and average balance useful life of the assets is 20 years. Project cost was Rs60mn/MW. Cumulative FY21 generation was 233MU (269.4MU in FY20) and CUF was 17.05% (19.72% in FY20).

* Another RE asset acquisition for TPW in FY21: Torrent’s focus is to increase its RE capacity. So, with highly competitive bidding environment, M&A is a good route to add assets. This is Torrent's 2nd acquisition in FY22 after the 50MW operational solar plant acquisition from LREHL India in Jul’21. This acquisition will give TPW entry in Rajasthan and Madhya Pradesh, which may benefit the company in future RE bids since these states are at the forefront of RE auctions. With this acquisition, TPW’s total capacity (including 515MW of under construction RE capacity and 50MW solar plant acquisition) will reach 4.6GW (1.5GW of which is RE).

* RE asset sale fits into CESC’s strategy: CESC intends to move out of RE and grow its distribution business, as evident in Chandigarh bid win. This deal falls into this strategy and moreover, CESC will receive a higher value on the asset (1.3x P/BV) than what we were ascribing (1x P/BV), which is Rs3.15bn (Rs7.9bn consideration less debt of Rs4.75bn) on its equity investment of Rs2.5bn. CESC’s total capacity post this sale will stand at 2.34GW.

* Valuation - CESC: We maintain our BUY rating and target price of Rs113/sh on CESC. The stock is currently trading at FY23E P/E of 7.9x, P/BV of 1x, and a dividend yield of 6.2%. We await the closure of the transaction to incorporate the sale of Surya Vidyut in our estimates. However, the option value at 1.3x PBV (Rs2.4/sh) is 25% higher than street ascribed value of 1x P/BV (Rs1.9/sh).

* Valuation - TPW: We maintain our REDUCE rating, but increase our target price for TPW to Rs425 (earlier: Rs409) as we rollover to FY24. However, improving demand and upcoming capex are the positives. We await the closure of the transaction to incorporate the acquisition of Surya Vidyut in our estimates. However, ascribing a platform value to the asset at 9x EV/EBITDA, the option value on closure of the acquisition is Rs6.5/sh. With an EBITDA of Rs1.1bn, the potential increase in TPW’s EBITDA for FY24E will be 2.7% (on FY24E EBITDA base of Rs40bn).

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