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Return to normalcy

Torrent Power’s (TPW) good performance in Q4FY21 was aided by return to normalcy in its distribution franchise (DF) businesses, profit on sale of RLNG, and lower interest cost. However, lower wind generation and higher AT&C losses in licensed distribution (DL) areas reducing incentive income were the dampeners. On a consolidated basis, revenues were up 3.4% YoY to Rs30.8bn, while EBITDA was up 10.6% YoY to Rs9.1bn. Reported PAT stood at Rs4bn (vs loss of Rs2.8bn in Q4FY20 due to impairment charges for DGEN), while adjusted PAT was up 7% YoY at Rs3.6bn.

Though the ongoing regional lockdown has hurt commercial power demand, industrial and residential demand remain strong and TPW expects faster catch-up post reopening. Final dividend of Rs5.5/sh takes the total payout to Rs11/sh for FY21 (41% of PAT). We increase our target price to Rs385 (from Rs376) incorporating 300MW capacity (earlier considered 150MW) for the solar project of TPW’s own discom. Maintain REDUCE.

* Conventional generation higher, wind lower: Conventional generation was up 3.7% YoY despite no operations at DGEN. AMGEN (up 28% YoY) and SUGEN (up 18% YoY) performed well due to higher demand at DL areas while UNOSUGEN generation was 2% lower YoY. Low wind speeds during the quarter impacted wind generation, which declined 9% YoY despite higher operational capacity. Solar generation was flat YoY.

* One-time charges during the quarter totaled Rs510mn (pre-tax) comprising Rs380mn reversal of provision for fuel cost under-recovery taken during Q3FY21, and Rs130mn reversal of provision for bad debt considered for the DF businesses. The management expects further recovery at Bhiwandi and Agra in the coming quarters.

* Distribution businesses performed well: Demand at all distribution areas returned to pre-covid levels during Jan-Feb’21, although the Mar’20 lockdown helped all areas post higher YoY demand in Q4FY21 (DL up 11% YoY and DF up 7% YoY). This helped improve the PBIT of DF businesses to Rs4.8bn in FY21 vs Rs1.3bn in H1FY21 (Rs7.6bn in FY20), and of DL businesses to Rs8.4bn from Rs2.5bn in H1FY21 (Rs9.5bn in FY20).

* Gas costs remained under control: TPW took benefit of availability of more than required low-cost RLNG (which it had booked last year), sale of which added Rs500mn to PBT. For its FY22 requirements, it has tied-up eight cargoes at ~US$4.36/mmbtu.

* Debt reduces further; capex to be steady: Gross debt declined to Rs75bn at FY21 – as the company prepaid Rs3.5bn apart from its scheduled repayments. This helped further reduce interest expense by 26% YoY for the quarter and 19% YoY for the year. Capex at distribution areas in FY21 was ~Rs12bn while guidance for FY22 is ~Rs14bn (Rs10bn12bn for DL and Rs2.5bn for DF). Additionally, the recently won solar projects (100MW GUVNL and 300MW Torrent Power Distribution) will involve a capex of Rs6bn-7bn in FY22. Thus, the total capex for FY22 is estimated at ~Rs20bn. The recently-won Daman & Diu and DNH distribution bid as well as Andhra Pradesh solar project bid remain subjudice.

* Valuation: We maintain REDUCE on TPW, but increase the target price to Rs385 (earlier: Rs376) incorporating 300MW capacity (instead of 150MW considered earlier) for its own discom’s solar project.

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