Torrent Power: Rising on bright prospects

Increase in rate and better gas availability will boost financials and stock valuations

A slew of positive changes and expectations have led to renewed interest in Torrent Power. The company, under pressure till some time ago because of the non-availability of gas for its power plants and huge under-recoveries, has seen things changing for the better. This comes at a time when the market had written off some of its power and distribution assets because of the uncertainty. Now its shares have jumped 41 per cent in a month. But, as re-rating continues, there could be more gains for the stock, which is currently trading at 14 times its FY15 estimated earnings.

Notably, a large part of the valuations the market is giving at this point is only for the existing operational power assets. The book value of its existing projects alone is Rs 80 a share. Given the 18 per cent return on equity (RoE) for the regulated business, even if a 1.5-1.8 times price-to-book value is applied, the value works out to Rs 120-144 compared with the current market price of Rs 163. Also, the company is sitting on cash of Rs 1,558 crore, equal to Rs 33 a share.

The valuation would rise further considering the company has two gas-based power projects of about 1,600 Mw, which are under construction and where Torrent has invested Rs 2,400-2,500 crore. These assets, which alone on a conservative basis have a book value of Rs 50 a share, are not fully considered by the market because of the issue of gas availability.

The Street believes that after the formation of the new government, there is high possibility that India's gas output might go up and the availability of gas, which was limited to fertiliser companies, could be extended to gas-based power plants. This would be significantly beneficial for companies such as Torrent Power, which has a total operational power generation capacity of 1,698 megawatts (Mw), of which 1,250 Mw is fuelled by gas and 400 Mw by coal. Currently, its 1,148-Mw gas-based power plant Sugen is operating at about 25-30 per cent plant load factor (PLF).

That apart, the market is also eyeing the turnround in earnings because of the recent order of the Gujarat Electricity Regulatory Commission (GERC). It allowed the company to implement rate increase. This means, there would not be any under-recoveries for the operational assets in the coming months. This will provide a big boost to Torrent's financials — the company had booked under-recoveries of Rs 680 crore in FY13. Due to the under-recoveries, the company's distribution business incurred a loss of Rs 340 crore in FY13, expected to double in FY14. Under-recoveries are over six times its FY14 net profit of Rs 105.26 crore.

Thus, the GERC’s approval of 75 paise rise (25 paise each over three quarters starting from Q1FY15) has led to higher expectations of the market as they believe the company's earnings will surge in FY15 and thereafter because of this move. In FY15, the market is expecting the company to make a net profit of Rs 552 crore mainly on account of higher recoveries. This will also mean improvement in the return ratios and, thus, a positive rub on the valuations in the coming months.