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MOSL: TORRENT POWER (INITIATING COVERAGE)-On growth track, again! Initiating coverage with a Buy rating

Torrent Power (initiating coverage): On growth track, again! Initiating coverage with a Buy rating

(TPW IN, Mkt Cap USD1.8b, CMP INR263, TP INR315, 20% Upside, Buy)

 

Torrent Power (TPL) is engaged in the distribution and generation of electricity. The company has installed generation capacity of 3.7GW and under-construction capacity of 0.8GW. TPL is the sole electricity distributor to the cities of Ahmedabad (incl. Gandhinagar), Surat, Bhiwandi and Agra, with a distribution reach of over 1,367sq.km. 

Present across the value chain – from generation to distribution

• TPL has a diversified portfolio spanning (i) regulated electricity distribution, (ii) franchisee-based distribution (DF), (iii) a mix of gas- and coal-based conventional generation and (iv) renewable energy (RE) generation. EBITDA mix is broadly equal across these four categories.
• The company's regulated distribution business is among the most efficient in India, delivering steady growth and generating assured returns. The DF business is turning around; capex requirement is low with no regulatory oversight to cap returns.
• TPL's RE capacity is likely to more than double in two years to 1.4GW; it has an attractive mix of (a) feed-in tariff-based capacities generating a high RoE and (b) under-construction competitively bid projects at >12% equity IRR.
• It has a mix of gas- and coal-based conventional generation capacity of ~3.1GW. Of this, ~1.3GW is under long-term PPA, generating healthy double-digit RoE, while the remaining ~1.8GW (all gas-based) is not utilized. 

Growth engine back on track

• The sourcing of imported LNG has improved the PLF of its gas plant which is under PPA, the DF business performance has improved now with the risk of contract expiry behind, and the likely doubling of RE capacity has bolstered the growth prospects. Also, privatization of electricity distribution in India is picking up pace gradually, which could provide new growth opportunities.
• We expect EBITDA/PAT CAGR of ~12% to INR40.8b/INR13.3b over FY19-21E, driven by RE, DF and steady growth in regulated distribution. Around 80% of TPL's EBITDA is driven by the stable and predictable segments of regulated distribution/generation and RE.
• Net debt to equity is likely to remain comfortable at ~1x, even as ~30% of the gross block remains unutilized and capex is on an uptrend.