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Distribution businesses outperform

Torrent Power’s (TPW) Q2FY22 numbers were boosted by outperformance in distribution businesses, particularly franchised distribution (DF) where losses reduced substantially, quarterly demand reverted to pre-covid levels and collections were almost 100%. On consolidated basis, revenues were up 16.6% YoY at Rs36.5bn and EBITDA grew 31.9% YoY to Rs9.4bn. Reported PAT was 83% higher at Rs3.7bn but, adjusting for one-offs in Q1FY21, adj. PAT rose 22.2% YoY. TPW’s focus on renewables continues with the acquisition of Surya Vidyut from CESC, which will add 156MW of wind assets to its portfolio. We expect distribution business profits to remain on the recovery path. However, in CY22E, when 75% of the required quantity of gas will be untied, higher prevailing gas prices may hurt profits. Maintain REDUCE.

* Wind generation higher: RE generation was up 24% YoY, but conventional was lower by 6.8% YoY, mainly due to no operations at DGEN (270MUs in Q2FY21) and reduction in PTC PPA by 25MW impacting SUGEN (down 15% YoY). AMGEN however was up 93% YoY and UNOSUGEN up 8% YoY. Gas EBITDA increased 8% YoY to Rs1.89bn.

* Q2FY22 PAT was impacted by: 1) Lower T&D losses (mainly at DFs) due to increase in industrial demand (+Rs700mn); 2) higher RE PLF YoY (+Rs460mn); 3) lower finance cost, due to 90bps lower interest rate YoY and 14.5% YoY lower debt at Rs74.7bn (+Rs440mn); 4) higher demand at DFs (+Rs130mn); 5) PPA reduction by PTC (- Rs50mn); 6) higher depreciation (-Rs150mn); 7) higher employee cost (-Rs100mn).

* Distribution businesses outperformed: Demand in DL/DF areas was up 18.5%/19.1% YoY. AT&C losses at Ahmedabad reduced by 322bps YoY to 6.1%, while the same at Bhiwandi/Agra/SMK reduced by 997/295/416bps to 13.1%/13.1%/42.3%. EBITDA of DF businesses was up 43.8% at Rs2.2bn, but DL EBITDA declined 3.1% to Rs3.4bn.

* Tying up gas cargoes to mitigate fuel price volatility: TPW expects the prevailing unprecedented gas prices to normalise by Mar’22. It has tie-ups till Dec’22 and has contracted three cargoes for each year from CY23-CY26, catering to 25% of the LT PPA requirement and domestic tie-ups, which cater to a further 25% of LT PPA requirement.

* Higher gas prices may impact UNOSUGEN: At UNOSUGEN, price cap post tariff approval by GERC in Jul’19 is Rs1.1/unit for fixed cost and Rs4.28/unit for variable cost (implying a gas cost of US$7.5/mmbtu). As per the PPA, landed price of power purchase (including FC for consumers) should not exceed the prevailing landed market price for medium-term power purchase during a given period, which was Rs5.6/unit at the time. Hence, at such high gas prices, we expected fixed cost under-recovery at UNOSUGEN. However, TPW expects entire FC recovery by keeping the plant available irrespective of gas prices, as per Section 62 provisions, which may be difficult in our view.

* Targets 5GW renewable capacity in next five years: TPW recently acquired 156MW Surya Vidyut (link) from CESC and another 50MW solar project (link). Currently, 2GW is in the pipeline and the target is to reach 5GW in five years with a hurdle IRR of 13%.

* Valuation: We maintain REDUCE but increase our target price to Rs435 (earlier Rs425), incorporating acquisition of Surya Vidyut. While improving demand and upcoming capex are positives, near-term headwinds of high RLNG prices may impact profits.

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