Potential For Generating Electrifying Returns!
The privatization of electricity distribution in India is speeding up, thereby generating new and lucrative growth opportunities. TPL boasts one of the strongest balance sheets in the private power sector.
Torrent Power
POTENTIAL FOR GENERATING ELECTRIFYING RETURNS!
Torrent Power Ltd. (TPL) is engaged in the business of electricity generation, transmission and distribution. It is a prominent player in the Indian power sector. It possesses an installed generation capacity of 3.7 GW and underconstruction capacity of 0.8 GW. It has a well-established track record of successfully executing a number of large power projects. It is the only company which is the sole electricity distributor to the cities of Ahmedabad, Surat, Bhiwandi and Agra, with a distribution reach of more than 1,367 sq. km. Additionally, it is also engaged in the manufacture and supply of power cables.
Financial Performance
The consolidated financial performance for the quarter ended March 2019 stands as follows: Total income from operations increased 4.07 per cent YoY to Rs2,924.80 crore in Q4FFY19 as against Rs2,810.36 crore in Q4FY19. EBITDA showcased a modest growth of 2.83 per cent YoY as it reached Rs709.80 crore in Q4FY19 from Rs690.26 crore in Q4FY18. Consequently, EBITDA margin stood at 24.27 per cent in Q4FY19 versus 24.56 per cent in Q4FY18. Net profit dropped substantially to Rs24.80 crore in Q4FY19 from Rs221.25 crore in Q4FY18, a drastic fall of 88.79 per cent. As a result, EPS sank to Rs0.50 in Q4FY19 from Rs4.51 in Q4FY18.
The consolidated financial performance for the year ended March 31, 2019, stands as follows: Total income from operations increased 14.24 per cent YoY to Rs13,150.97 crore in FY19 from Rs11,512.09 crore in FY18. EBITDA exhibited a minor improvement of 2.64 per cent as it rose to Rs3,199.48 crore in FY19 from Rs3,117.13 crore in FY18. EBITDA margin came in at 24.33 per cent in FY19 in comparison to 27.08 per cent in FY18. Net profit dipped 5.07 per cent to Rs903.83 crore in FY19 from Rs952.12 crore in FY18. As a consequence, net profit margin (NPM) stood at 6.87 per cent in FY19 while it was reported at 8.27 per cent in FY18. EPS declined 4.64 per cent YoY to Rs18.70 in FY19 from Rs19.61 in FY18.
On the valuation front, the P/E ratio came in at 14.5x in FY19 as against 11.7x in FY18. The EV/EBITDA multiple improved to 6.8x in FY19 from 6.2x in FY18. Dividend yield also increased to 1.8 per cent in FY19 from 1.0 per cent in FY18. On the profitability front, the return on equity (RoE) dropped to 10.8 per cent in FY19 from 12.9 per cent in FY18. Meanwhile, the return on capital employed (RoCE) remained more or less flat at 8.5 per cent in FY19. The net debt-to-equity ratio stood at 1.0 x in FY19 in comparison to 1.1x in FY18.
Operating Performance
In FY19, most of the key operating drivers which govern the success of the company’s business demonstrated a positive trend. These include an improvement in RoE of regulated businesses, increase in sales volumes and contribution margin, decrease in transmission & distribution (T&D) losses and overall improvement in key efficiency parameters.
The liquidity position improved by Rs108 crore during the year as the company’s liquidity, including mutual fund investments and bank/financial institution deposits, stood at Rs1,253 crore in FY19. During the year, the company incurred capital expenditure of Rs1,692 crore. The net debt rose by Rs118 crore to Rs9,455 crore in FY19.
TPL followed cash-accounting for its regulated distribution business until FY18. It has now switched to accrual accounting for its regulated distribution circles w.e.f. FY19. TPL’s earnings were unpredictable due to cash accounting. Thus, the move to accrual accounting should diminish the capriciousness in reported earnings.
The plant load factor (PLF) is a significant parameter to gauge the performance of a power plant. It indicates the degree of plant capacity utilisation for a period of time. A higher PLF means the company is generating higher revenues, as the cost of per unit (kWh) energy generated will be lesser. The PLF of the 422 MW coal-based AMGEN power plant improved on the back of better fuel cost as well as its status as an embedded generation plant. Meanwhile, the PLF of the 1147.5 MW gas-based SUGEN mega power plant dropped marginally in comparison to FY18 due to lower off-take by long-term beneficiaries and under-utilisation of merchant capacity. However, compared to other gas-based plants in India, SUGEN performed at reasonably good PLFs despite suffering a continuing unavailability of domestic gas and higher cost of imported LNG. This is attributable to superior efficiency of plant operations, prudent use of imported LNG contracted at smart prices and selling of power through short term contracts. Improved solar irradiation resulted in higher solar PLF. Similarly, wind PLF was also enhanced as the projects commissioned last year successfully completed their first year of full operations. Moreover, improved wind speeds also helped augment performance of the wind power plants.
Sales growth in Ahmedabad came in at 5.02 per cent representing normal load growth. In FY19, sales in Dahej increased by 36.64 per cent due to the addition of new consumers. Rising industrial demand was also a noteworthy contributor as it gave a boost to revenues. Contrarily, the slowdown in the textile and diamond industries caused the sales in Surat to drop marginally. The sales in Bhiwandi too were impacted slightly due to the strike taking places in the power loom industry. Fortunately, the ramifications of this were arrested by a reduction in aggregate technical & commercial (AT&C) losses and growth in residential and commercial consumer sales.
The company succeeded in lowering its T&D losses further in FY19 as compared to FY18 and they continue to be the lowest in India. T&D losses represent electricity that is generated but does not reach the intended customers. During FY19, the company was awarded a distribution licence for the supply of electricity in DSIR for 25 years. The licence area spans across 920 sq. km. and is a part of the Delhi-Mumbai Industrial Corridor in Gujarat.
Projects under construction
The company has a number of major projects under construction such as the 499.8 MW wind power project in Gujarat and the 126 MW wind power project in Maharashtra. The former is scheduled to be commissioned by November 2019 and is delayed mainly on account of the land availability issues prevalent in Gujarat. However, the delay will not have any material impact on costs, and the project will be set up at an expected cost of Rs3,329 crore. The latter will be commissioned in January 2020 and will be set up at an expected cost of Rs918 crore. Yet another project is the 115 MW wind power project in Gujarat which will be set up at an expected cost of Rs800 crore and will be commissioned in July 2020. A 100 MW wind power project in Gujarat is also in the pipeline at an estimated cost of Rs683 crore. This project, which is being implemented through SPVs,, is expected to be commissioned by July 2019.
Risks
The AMGEN plant is required to comply with stricter emission norms by December 2022 which will require significant capital expenditure on the company’s part. Failure to comply could result in the company having to phase out the plant on or before December 2022. Of the 851 MW of underconstruction renewable projects, 625 MW worth of projects are enduring execution challenges which are further delaying their completion. The regulatory conditions applicable to the company’s licensed distribution business could cause delays in recovery of some part of the cost. At the end of FY19, the unrecovered and undisputed regulatory claim stood at Rs940 crore. The company is exposed to fluctuations in the prices of LNG in international markets as it imports the same from overseas. The management is taking efforts to win long term power purchase arrangements (PPAs) to address the problem of unutilised gas power capacity. However, the government impetus to renewable energy generation capacity along with the falling tariffs of renewable power could become an obstacle in resolving the problem of the company’s uncontracted generation capacity. The dearth of short-term power contracts and unfeasible prices in the short-term power market resulted in a substantial portion of the company’s capacity remaining unutilised.
Growth Drivers
The Gujarat Electricity Regulatory Commission (GERC) extended its approval for the 278 MW long-term PPA between the UnoSugen gas plant and the distribution circles in Ahmedabad and Surat. However, the PPA is subject to the purchase cost from UnoSugen (including gas cost and fixed charges) being less than the cost of medium-term power. The company will have to sign medium-term LNG contracts which will render it vulnerable to the movement in crude oil prices. However, the company will hedge its exposure towards the same. TPL has safeguarded the debt obligations and overhead costs of the plant, thereby ensuring sustainable profitability. Furthermore, TPL has planned for capex of Rs1,600 crore for its licence and distribution franchise. Also, the capex for wind projects over FY20/21 is estimated at Rs3,800 crore. The company possesses regulatory assets worth Rs9,400 crore, of which Rs200 crore worth of assets have already been approved and Rs7,400 crore worth of assets are likely to get approval in the near future. The installed renewable energy (RE) capacity is expected to more than double to 1.4 GW by FY21.
Conclusion
The sourcing of imported LNG has improved the PLF of the company’s gas plant which is under PPA. The risk of contract expiry in the distribution franchisee (DF) business has been eliminated. Moreover, the privatisation of electricity distribution in India is speeding up, thereby generating new and lucrative growth opportunities. TPL boasts of one of the strongest balance sheets among the private power sector players. Moreover, the consolidation in the conventional generation sector bodes well for the future prospects of the company. TPL’s aggressive foray into RE generation has enhanced the company’s revenue visibility. By virtue of these factors, we urge our reader-investors to BUY this stock.