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Cautious over high valuation.

Torrent Power Ltd. (TPL) is one of the leading power utility companies in India, with functions across generation, transmission, and distribution. It has operations spread across Gujarat, Maharashtra, UP, and Karnataka.

• Q3FY24 saw a decent operational performance with an uptick in the PLFs of thermal and renewable capacity. T&D losses declined in all distribution areas barring Ahmedabad. SMK T&D loss continue to remain high, but shows signs of improvement.

• However, TPL posted flat revenues while lower net gains from LNG trading and merchant power sales dents PBT (47%YoY). Higher depreciation and finance costs offset gains from distribution and renewables.

• Cargo tie-ups indicate plans to tackle summer demand with a focus on tapping merchant power market opportunities. More cargoes are to be booked to benefit from softening gas prices.

• However, we turn cautious over high valuation concerns, execution risks and the now devoid opportunity of gains from LNG trading, which was a key driver for higher profits in the last few quarters.

• Therefore, we value the stock at 2.9X P/Bk over FY26BVPS, and maintain the SELL rating with a target price of Rs.1,038.

Higher operating expense drags PAT

Posting a flat revenue of Rs. 6,366cr. (-1%YoY), a 47%YoY decline was seen in PBT due to lower gains from gas trading and merchant power sales compared to the corresponding period last year. Higher wind capacity availability, an increase in ROE on capitalisation of capex, solar and O&M incentives uplifted renewables and distribution segment EBITDA (16% and 8% YoY YoY, respectively), but the gains were offset by higher depreciation and finance costs. Resultantly, this led to a 46%YoY decline in PAT to Rs. 374cr.

Decent operational performance

With a 5% increase seen in the distributions segment in this quarter, thermal capacities (both coal and gas plants) operated at higher PLFs. Wind capacity PLFs were higher on account of the availability of the 50 MW SECI-I wind power project and contributions from the 115 MW SECI-V project. The distribution segment saw a decline in T&D losses in all distribution areas except Ahmedabad, where the losses were higher by 351bps YoY. The SMK T&D losses continue to remain high at 30.01%, although 1980bps YoY decline was seen in this quarter

Gearing up for summer

Power demand is expected to increase, presenting an opportunity to sell higher on the merchant market. In order to make the most of this opportunity, the company has additionally tied up 5 cargoes to meet Q4FY24 and Q1FY25 needs. Further bookings of cargo are expected as the natural gas price continues to soften, thereby reducing input costs for thermal generation.

Valuation

We reduce the FY24E/FY25E/FY26E PAT estimates by 4.3%/2.5%/1.2% respectively, as softening gas prices limit the erstwhile opportunistic advantage from LNG trading. We exercise caution over the execution risks in renewable capacity additions, current high valuations, and the recent run-up in the price of the stock. Hence, we value the stock at 2.9X P/Bk on FY26BVPS and maintain the SELL rating with a target price of Rs.1,038.