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Torrent Power’s (TPW) Q1FY23 numbers were bolstered by good performance in the distribution business, particularly franchised distribution (DF), and renewables. On YoY basis, AT&C losses reduced while power sales exceeded pre-covid levels in all DF areas. DL businesses earned higher RoE and incentives. RE segment’s contribution to profit was higher YoY due to higher PLFs and capacity addition from recent acquisitions. On consolidated basis, revenues surged 110% YoY to Rs65.1bn as the acquired DDDNH licensed distribution area was consolidated. EBITDA rose 45.6% YoY to Rs10.6bn while reported PAT was up 143% YoY at Rs5bn. Adjusting for a few oneoffs in both Q1FY23 and Q1FY22, adjusted-PAT was up 78.4% YoY at Rs4bn. With the strong operational performance in Q1FY23, especially in the DF segment, we believe growth over FY23E-FY24E will be driven by distribution businesses and commissioning of new RE capacities. Downgrade to REDUCE (from Hold).

* Profit increased due to several factors: Q1FY23 consolidated adjusted PBT was up 126% YoY at Rs6.7bn mainly due to: 1) profit on sale of LNG (+Rs890mn), 2) lower depreciation charge for DGEN (+Rs410mn), 3) forex gain (+Rs150mn), 4) reduction in T&D losses in DF areas (+Rs380mn), 5) higher volumes in DF areas (+Rs410mn), 6) higher RoE and incentives in DL areas (+Rs220mn), 7) higher O&M savings in DL areas (+Rs110mn), 8) solar incentives in DL areas (+Rs210mn), 8) higher RE PLFs (+Rs330mn), 9) profit due to recent RE acquisitions (+Rs300mn), and 10) increase in cable business volumes (+Rs160mn). Solar incentives were received on account of >10% growth in installation of solar rooftop capacity, as per the prevalent scheme of the MNRE and Gujarat government. 82MW rooftop capacity has been installed in TTM up to Q1FY23, resulting in incentive income of Rs210mn (5% incentive per MW at a cost assumption of Rs50mn).

* DFs perform well; generation from RE increased but gas declined: On YoY basis, AT&C losses at Bhiwandi/Agra/SMK declined 32bps/318bps/523bps YoY adding Rs300mn to EBITDA, while volumes increased by 24%/28%/11% YoY aiding Rs650mn to EBITDA. Although T&D losses at Ahmedabad/Surat were 162bps/38bps higher YoY, mainly due to seasonality (no P&L impact), company expects it to normalise to FY22 levels by FY23-end. Generation at AMGEN (685MU, +37%) was higher, but that at gas stations was lower – UNOSUGEN (6MU, vs 596MU in Q1FY22), SUGEN (550MU, lower by 66% YoY), DGEN (0) – resulting in lower SHR savings. Wind generation increased by 16% YoY to 469MU while solar increased by 63% YoY to 91MU.

* Lower generation to continue due to elevated gas prices: For CY22, only one LNG cargo is contracted (at US$21/mmbtu) while existing tie-ups meet only 25% of TPW’s gas requirements. Since 75% of the requirement for CY22 is still untied, gas-based generation will continue to be tepid. However, medium-term outlook is better since, for CY23-CY26, TPW has tied up for 50% of its gas requirement. Company has contracted power on shortterm basis for its DL areas to cater to the higher demand. However, the elevated power purchase cost may lead to regulatory assets build-up for DL businesses (some part will be liquidated during the year). Regulatory assets at FY22-end were at Rs19bn.

* Valuations: While we increase our SoTP-based target price to Rs502 (earlier: Rs488), we downgrade TPW from Hold to REDUCE due to the recent stock price run-up (+14.4% in past one month). We incorporate higher power sales volumes for all DF areas (2-5% higher than FY20 {pre-covid} levels), on the back of the strong volume performance in Q1FY23.

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