Initiating Coverage | 19 March 2019
Sector: Utilities
Torrent Power
AL
ENTION
CONV
ATION
GENER
On growth track, again!
Dhruv Muchhal - Research analyst
(Dhruv.Muchhal@motilaloswal.com@MotilalOswal.com); +912261291549
Research analyst: Sanjay Jain
(SanjayJain@motilaloswal.com@MotilalOswal.com);+912261291523/Aniket Mittal
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Torrent Power
Contents | Torrent Power: On growth track, again!
Summary....................................................................................................................... 3
Present across value chain – from generation to distribution
...................................
5
Regulated distribution provides steady growth
.........................................................
8
Distribution Franchisees turning around
..................................................................
13
Renewable energy driving growth
............................................................................
16
Generation: Efficient operations driving healthy RoE
..............................................
19
Growth engine back on track
.....................................................................................
22
Valuation
....................................................................................................................
25
SWOT analysis
............................................................................................................
28
Management team
.....................................................................................................
29
Financials and valuations
...........................................................................................
30
19 March 2019
2
 Motilal Oswal Financial Services
Initiating Coverage | Sector: Utilities
Torrent Power
BSE Sensex
38,363
S&P CNX
11,532
Torrent Power
CMP: INR263
TP: INR315 (+20% )
Buy
On growth track, again!
Stock Info
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
Initiating coverage with a Buy rating
TPW IN
481
126.4 / 1.8
277 / 212
3/5/-7
311
46.4
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
Financial Snapshot (INR b)
2019E 2020E
Y/E March
Sales
133.5 138.4
EBITDA
32.8
36.6
NP
10.6
11.1
EPS (INR)
22.0
23.1
EPS Gr. (%)
12.1
5.1
BV/Sh. (INR) 176.6 193.7
P/E (x)
11.9
11.3
P/BV (x)
1.5
1.3
RoE (%)
13.0
12.5
RoCE (%)
8.8
8.8
2021E
143.6
40.8
13.3
27.6
19.5
215.3
9.5
1.2
13.5
9.4
Shareholding pattern (%)
Dec-18 Sep-18 Dec-17
As On
Promoter
53.6
53.6
53.6
DII
18.3
19.6
19.2
FII
7.1
5.8
6.3
Others
21.1
21.1
21.0
FII Includes depository receipts
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
Torrent Power
On growth track, again!
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.
Strong positioning and healthy balance sheet; Initiate with Buy
Dhruv.Muchhal@motilaloswal.com
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TPL has one of the best balance sheets in the private power sector. It is
present across different segments of the sector, which provides it with a
strong platform for future growth. In our view, the company is well poised
to capitalize on opportunities stemming from distribution privatization, the
thrust on RE, and consolidation in the conventional generation sector. We
value the stock on an SOTP basis at INR315/share, implying an upside of
20%. The SOTP method does not capture any value for the shut gas capacity
of 1.8GW. The stock trades attractively at ~1.2x FY21E P/BV. We initiate
coverage on the stock with a
Buy
rating. Higher LNG prices and lower wind
PLF, however, are the potential risk factors.
3
19 March 2019
 Motilal Oswal Financial Services
Torrent Power
Exhibit 1: Diversified portfolio
Others
(incl. DF)
14%
Gross Block
FY21 (%)
Exhibit 2: ~80% of EBITDA from stable/predictable segments
Reg. distribtion
% EBITDA
17
13
Reg.
generation
10%
34
36
FY18
Source: MOFSL, Company
20
16
31
32
FY19E
20
27
22
31
FY21E
Source: MOFSL, Company
Reg. generation
RE
Others (incl. DF)
Reg.
distribution
27%
RE
25%
Untied
generation
24%
Exhibit 3: EBITDA CAGR of ~12% over FY19-21E
Exhibit 4: Balance sheet best amongst private sector
Net debt to Equity
FY18 - x
>1
Classified NPAs
or under financial
stress
3.2
1.7
1.1
1.1
1.4
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 5: P/BV 1-year forward (x)
4.0
3.0
2.0
1.0
0.0
Source: Bloomberg
Exhibit 6: Utilities sector valuation
Rating
Powergrid
NTPC
JSW Energy
CESC
Tata Power
NHPC
Torrent Power
Coal India
Buy
Buy
Neutral
Buy
Neutral
Buy
Buy
Buy
Up/(dw) MCAP
(USD M) FY19E
(INR) (INR)
%
199
136
68
744
73
26
263
246
232
163
73
800
69
31
315
281
17
20
8
7
-5
22
20
14
14,870
19,220
1,588
1,416
2,832
4,032
1,775
22,193
18.3
11.1
3.8
75.4
2.5
2.2
22.0
27.4
CMP
TP
EPS
FY20E
20.8
13.8
4.6
80.0
6.6
2.6
23.1
29.0
FY21E
22.6
15.7
4.1
90.6
6.7
3.1
27.6
29.9
P/E (x)
FY19E
10.9
12.2
18.0
9.9
29.0
11.6
11.9
9.0
FY20E
9.6
9.9
14.8
9.3
11.0
9.6
11.3
8.5
P/B(x)
FY19E
1.7
1.2
1.0
1.1
1.2
0.9
1.5
7.4
FY20E
1.6
1.2
1.0
1.0
1.1
0.8
1.3
6.8
RoE (%)
FY19E
16.7
10.4
5.5
11.4
4.3
7.4
13.0
84.1
FY20E
17.1
12.2
6.5
11.2
10.3
8.7
12.5
83.7
Source: MOFSL, Company
19 March 2019
4
 Motilal Oswal Financial Services
Torrent Power
Present across value chain – from generation to distribution
Positioning and healthy balance sheet provides strong base for growth
Torrent Power (TPL) is present across the value chain from electricity distribution to
generation. It is into regulated electricity distribution, franchisee-based distribution,
has a mix of gas and coal-based conventional generation capacity and has built its
renewable generation capacity over the last few years. It has an installed generation
capacity of 3.7GW, under-construction capacity of 0.8GW and distribution reach of
over 1,367 sq. km.
Present across value chain from generation to distribution
It has
regulated electricity distribution
license in the Tier-1 city of Ahmedabad
(incl. Gandhinagar) and in the Tier-2 city of Surat, both in Gujarat. It faces no
competition in these circles and its AT&C losses are amongst the lowest. Also,
the regulatory norms in these circles are amongst the tightest; hence, we
believe it has low regulatory risk. TPL was recent awarded distribution of the
Dholera Special Industrial Region (Dholera SIR).
Its two
Distribution Franchisee
(DF) circles have seen sharp performance
improvement in the last few years as uncertainty of contract renewal is behind,
capex over the last few years is reaping benefits and institution support has
improved. Capex in a DF circle is generally low as basic network infrastructure is
already in place, and since the DF model is not subject to regulatory norms, it
does not restrict the return potential. It recently won the DF license for Shil,
Mumbra & Kalwa area, which is adjacent to one of its existing circles.
It has ventured aggressively into
renewable energy
(RE) generation. It’s installed
RE capacity should more than double to 1.4GW by FY21. It has a mix of lucrative
feed-in tariff capacities earning healthy double-digit IRRs, and new competitively
bid projects at 12-14% equity IRR.
TPL has
conventional generation
capacity of 3.1GW, mix of gas and coal-based
plants. ~1.3GW capacity is under long-term PPAs with its own distribution arm
and is earning healthy double-digit RoE, aided by efficient operation and
favorable norms. The remaining capacity of 1.8GW (gas-based) is untied. Also, it
does not have any under-construction conventional generation plants.
Growth engine back on track
TPL’s growth engine is 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.
~80% of TPL’s EBITDA is driven by the stable and predictable segments of
regulated distribution/generation and RE.
We expect EBITDA/PAT to increase by CAGR of ~12% over FY19-21E to
INR40.8b/INR13.3b, respectively, driven by RE, DF and steady growth in the
regulated distribution business.
19 March 2019
5
 Motilal Oswal Financial Services
Torrent Power
Exhibit 7: ~80% EBITDA is from stable/predictable segments
Reg. distribtion
% EBITDA
17
13
34
36
FY18
20
16
31
32
FY19E
20
27
22
31
FY21E
Source: MOFSL, Company
Reg. generation
RE
Others (incl. DF)
Exhibit 8: PAT CAGR of ~12% over FY19-21E (INR b)
13.3
9.0
9.4
10.6
11.1
3.9
1.1
3.6
4.3
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Source: MOFSL, Company
RoIC best amongst the private sector players
TPL’s RoIC is amongst the best in the private power sector players and only
marginally lower than the regulated businesses of public sector companies like
NTPC and Power Grid, despite no contribution from unutilized gas plants (~25%
of gross block by FY21E). These gas plants have a future, in our view, but the
timing is uncertain.
Exhibit 9: Consolidated RoIC (pre-tax, %) – best amongst private sector players
TPL
15.0
13.0
11.0
9.0
7.0
TPWR
CESC
JSWE
NTPC
PWGR
Source: MOFSL, Company
Volatility in earnings to reduce on accrual accounting in distribution
TPL has moved from cash accounting to accrual accounting for its regulated
distribution circles w.e.f. FY19.
While the regulator allows full pass-through of power purchase cost in tariffs,
there is often a lag between incurring cost and the subsequent recovery.
Other private DISCOMs follow accrual accounting. TPL’s earnings were volatile
due to cash accounting. The shift to accrual accounting should reduce volatility
in reported earnings.
Healthy operating cash flow; Strong balance sheet
We expect operating cash flow generation to steadily improve. FCF will,
however, be negative due to growth capex in RE.
Leverage ratio is likely to remain comfortable even as capex momentum is
expected to increase. While gross block and net block is expected to increase by
~INR85b and ~INR46b, respectively, the net debt is expected to increase by only
~INR20b over FY18-21E, on strong operating cash flow generation.
6
19 March 2019
 Motilal Oswal Financial Services
Torrent Power
We expect net debt to equity and net debt to EBITDA to remain steady despite
the higher capex, at ~1x and ~2.5x, respectively.
TPL’s leverage ratios are amongst the lowest in private power sector. It is well
placed with experience across the power sector value chain – distribution,
conventional generation and RE – to capture emerging growth opportunities
across the value chain.
Exhibit 11: Net debt to EBITDA (x)
Net debt to EBITDA - x
5.5
4.9
3.8
2.0
3.4
2.4
1.1 1.2
3.2
2.7
3.0 3.1
2.5
Exhibit 10: Net debt to Equity to remain lower despite capex
Net debt - INR b
Net debt to Equity - x
0.8 0.8
0.5 0.5
0.8
1.2 1.2
1.1 1.1 1.1 1.1 1.1 1.1
1.0
4.7
23 26 19 24 46 66 70 70 72 78 83 99 113 103
Source: MOFSL, Company
Source: MOFSL, Company
Strong positioning and healthy balance sheet; Initiate with Buy
TPL has one of the best balance sheets in the private power sector. It is present
across different segments of the sector, which provides it with a strong platform for
future growth. In our view, the company is well poised to capitalize on opportunities
stemming from distribution privatization, the thrust on RE, and consolidation in the
conventional generation sector. We value the stock on an SOTP basis at
INR315/share, implying an upside of 20%. The SOTP method does not capture any
value for the shut gas capacity of 1.8GW. The stock trades attractively at ~1.2x
FY21E P/BV. We initiate coverage on the stock with a Buy rating. Higher LNG prices
and lower wind PLF, however, are the potential risk factors.
19 March 2019
7
 Motilal Oswal Financial Services
Torrent Power
Regulated distribution provides steady growth
One of the most efficient DISCOMs in India
TPL is the only electricity distribution licensee in the city of Ahmedabad (incl.
Gandhinagar) and Surat, in the state of Gujarat. It also has license for distribution in
Dahej, but on a smaller scale. It operates on a regulated model, with performance
and capex monitored by the regulator. Tariff and returns are also fixed by the
regulator. It earns normative RoE on invested equity and certain incentive incomes,
which are linked to operating parameters.
Steady electricity demand growth in Ahmedabad and Surat
Its license covers a total area of 408sqkm over two cities—Ahmedabad is a Tier-I city
and Surat is a Tier-II city. It serves ~2.5m customers and in FY18 met a combined
peak demand of ~2.5GW. The distribution license for Ahmedabad is valid till 2025
and for Surat till 2028. Peak electricity demand in Ahmedabad and Surat has grown
at ~6% CAGR over the last decade – a mix of customer addition and per capita
consumption increase. In its tariff petition, the company has cited that it expects
electricity demand to grow by 3-5% up to FY21. We expect peak demand to grow at
a higher rate as we expect increase in share of residential customers (who are
generally evening peak loaders).
Peak demand in
Ahmedabad and Surat has
grown at CAGR of ~6% over
the last decade
Exhibit 12: Peak demand in Ahmedabad and Surat (GW)
1.41
1.47
1.50
1.72
1.86
1.87
2.00
2.19
2.20
2.40
2.50
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Source: MOFSL, GERC, Company
The customer base in A’bad
and Surat has increased at
~3% CAGR over the last
decade
Exhibit 13: Customer base in Ahmedabad and Surat
A'bad - mn
Surat - mn
2.2
0.6
1.7
FY13
2.3
0.6
1.7
2.3
0.6
1.7
2.4
0.6
1.8
2.4
0.6
1.9
2.5
0.6
1.9
0.0
1.9
2.0
0.5
1.4
FY09
2.0
0.5
1.5
FY10
2.1
0.5
1.5
FY11
2.2
0.5
1.6
FY12
1.9
FY08
FY14
FY15
FY16
FY17
FY18
Source: MOFSL, GERC, Company
19 March 2019
8
 Motilal Oswal Financial Services
Torrent Power
Exhibit 14: Electricity sales by customer category in Ahmedabad and Surat (%)
Residential
Industrial
20
51
22
48
Commercial
22
47
22
46
Others
21
45
21
45
20
46
More than 65% of
electricity sales in
Ahmedabad and Surat are
to high paying industrial
and commercial customers
14
60
15
58
16
57
17
55
24
FY08
26
FY09
26
FY10
27
FY11
28
FY12
28
FY13
29
FY14
31
FY15
32
FY16
33
FY17
32
FY18
Source: MOFSL, GERC, Company
Regulated equity to grow at ~8% CAGR over FY18-21E
Invested equity (or regulated equity) is linked to capitalization (@30% according to
the existing regulations in Gujarat). The key driver of capitalization/capex in
distribution is the growth in peak electricity demand, which in turn drives demand
for laying distribution network, transformers, substations, meters and other back-
end infrastructure. Capitalization is also aided by measures to reduce transmission
and distribution (AT&C) losses (like smart metering, IT infrastructure, under-
grounding of cables, etc.).
Regulated equity in Ahmedabad and Surat circle combined has grown at a CAGR of
~7% over FY13-18 (when the peak demand growth was ~6%). We expect regulated
equity to grow at CAGR of ~8% over FY18-21E. The higher growth is on account of
increase in spending to cater to demand growth, improve reliability and to further
reduce AT&C losses.
Capitalization run-rate is
likely to remain high on
account of an increase in
spending to cater to
demand growth, improve
reliability and to further
reduce AT&C losses
Exhibit 15: Capitalization in Ahmedabad and Surat (INR b)
A'bad
7.1
1.0
6.2
Surat
7.7
0.7
7.0
8.5
1.5
8.5
1.5
4.2
7.0
7.0
0.7
3.5
FY17
FY18
FY19E
FY20E
FY21E
5.9
0.6
2.4
0.2
2.2
FY14
2.7
0.4
2.3
FY15
5.3
FY16
Note: Capitalization is net of deletion and contribution from customers
Source: MOFSL, Company
We expect regulated equity
in A’bad and Surat
combined to grow at CAGR
of ~8% over FY18-21E
Exhibit 16: Regulated equity in Ahmedabad and Surat (INR b)
A'bad
Surat
22
6
16
25
6
27
7
28
7
16
5
11
FY13
16
5
11
FY14
17
5
12
FY15
18
6
13
FY16
20
6
14
FY17
18
20
21
FY18
FY19E
FY20E
FY21E
Source: MOFSL, GERC, Company
19 March 2019
9
 Motilal Oswal Financial Services
Torrent Power
Normative RoE has very low risk of cuts
Normative RoE is the return fixed by the regulator on regulated equity. It is 14% for
the Ahmedabad and Surat circles. The normative RoE is lower than the Central
Electricity Regulator’s normative RoE of 15.5% (for generation and transmission
businesses) and lower than the normative RoE of other private sector DISCOMs in
India (Tata Power Mumbai is 16%, CESC’s Kolkata is 16.5%). We believe there is very
low risk of a cut in the normative RoE in the Ahmedabad and Surat circles.
Normative RoE for Torrent
Power is already lower than
its regulated peers; hence,
we see limited downside
risk
Exhibit 17: Normative RoE in Ahmedabad and Surat compared to peers (%)
16.5
16.5
16.5
15.5
14.0
14.0
Torrent A'bad
Torrent Surat TPWR Mumbai
TPWR Delhi
CESC Kolkata
CERC (Gen. &
Trans.)
Source: MOFSL, GERC, Company
Amongst the lowest AT&C losses in the country
AT&C losses in the Ahmedabad and Surat circle are one of the lowest in the country,
and they have continued improving over the years. Losses in Ahmedabad have
declined from 7.3% in FY13 to 6.3% in FY18; while in Surat it has declined from 4.2%
in FY13 to 3.6% in FY18. The losses are lower than the normative parameters set by
the regulator. Incentive income is a function of the difference in the normative and
actual AT&C loss (@ of the power purchase cost). We estimate that TPL earns
additional RoE of ~1-3% on regulated equity through savings in AT&C losses, which
would continue.
Exhibit 18: AT&C losses in Ahmedabad – Actual & Normative
Actual AT&C - %
8.5
8.5
8.5
8.5
7.5
7.0
Norm. AT&C - %
5.2
Exhibit 19: AT&C losses in Surat – Actual & Normative
Actual AT&C - %
5.2
5.2
3.9
Norm. AT&C - %
3.7
7.3
FY13
7.3
FY14
7.3
FY15
7.2
FY16
6.8
FY17
6.3
FY18
4.3
FY14
4.1
FY15
3.9
FY16
3.9
FY17
3.6
FY18
Source: MOFSL, GERC, Company
Source: MOFSL, GERC, Company
19 March 2019
10
 Motilal Oswal Financial Services
Torrent Power
AT&C losses in Ahmedabad
and Surat are one of the
lowest in the country
Exhibit 20: AT&C losses in other private DISCOMs and some public DISCOMs - %
Private DISCOMs
A'bad - TPL
Surat - TPL
Kolkata - CESC
BSES Delhi
Delhi - Tata
Public DISCOMs
AP
Gujarat
KAR
Telangana
6.3
3.6
9.8
10.7
9.5
8.7
11.7
14.7
14.7
Source: MOFSL, UDAY, Company
TPL earns efficiency
incentives of ~1-4% of
regulated equity as its
losses are lower than the
normative losses fixed by
the regulator
Exhibit 21: Efficiency incentive through lower AT&C losses
AT&C incentive (A'bad+Surat) - INR m
3.0
3.3
3.7
% of reg. equity - %
2.7
1.1
430
FY13
490
FY14
543
FY15
645
FY16
218
FY17
1.1
237
FY18
Source: MOFSL, GERC, Company
Move to accrual-based accounting to reduce volatility in reported earnings
TPL has moved from cash accounting to accrual accounting for the regulated
distribution circles. While the regulator allows full pass-through of power purchase
cost in tariffs, there is often a lag between incurring-of-cost and the recovery.
Portion of the difference is routinely adjusted through a mechanism called ‘FPPPA
adjustment’. However, this is also capped to avoid tariff shocks to consumers
(quarterly change restricted to INR0.1/kWh). The ‘FPPPA mechanism’ was allowed
only for identified sources of power purchase until FY14. This had led to longer
duration gaps in recovering differential revenue. Cash accounting had led to
volatility in reported earnings, which will reduce on adoption of accrual accounting.
Other private DISCOMs already follow accrual accounting.
Cash nature accounting of
the difference in estimated
and actual power purchase
cost and prior period
revenues led to significant
volatility in earnings. Shift
to accrual accounting from
FY19 will reduce this
volatility
Exhibit 22: (Under)/Over recovery in A’bad circle impacting reported performance (INR b)
1.8
0.8
0.3
-1.1
-0.4
-3.9
FY11
FY12
FY13
-4.0
FY14
FY15
FY16
FY17
Source: MOFSL, GERC, Company
19 March 2019
11
 Motilal Oswal Financial Services
Torrent Power
As actual fuel cost
increases, the FPPPA billing
also increases. This
improves revenue recovery
and reduces the cash flow
drag
Exhibit 23: Movement in actual fuel cost and FPPPA billing
Actual fuel cost - INR/kWh
1.1
FPPPA billed - INR/kWh
1.5
0.8
0.9
1.0
1.5
1.5
1.8
1.9
4.5
4.9
4.9
4.6
4.7
5.3
5.6
5.5
5.7
Source: MOFSL, Company
Recently awarded license for Dholera area
TPL was recently awarded distribution license for the Dholera Special Industrial
Region (Dholera SIR) of ~920 Sq Kms for 25 years. It is a parallel license besides the
existing state DISCOMs - UGVCL/PGVCL. Dholera SIR is a major project under the
Delhi-Mumbai Industrial Corridor (DMIC) Project with an aim to make it a global
manufacturing hub supported by world class infrastructure. The license is under a
regulated model based on post-tax RoE of 14%.
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Torrent Power
Distribution Franchisees turning around
Contract renewal uncertainty behind
TPL has an electricity distribution franchisee (DF) at Bhiwandi in Maharashtra and at
Agra in Uttar Pradesh (UP). DF is a type of contracting of the distribution function by
a DISCOM (franchisor).
Reducing AT&C losses—an earnings driver for the DF business
Unlike the regulated distribution business, the power purchase cost and other
operating cost is not a pass-through in the franchisee business.
Franchisees have no role in setting tariffs for customers. Tariffs applicable to the
DISCOM’s operating area apply to the DF’s area as well. Power purchase cost
(per unit) is either negotiated or is put up for bidding. Profitability is driven by
the pace and quantum of reduction in AT&C loss.
Regular capex, including growth capex, is the responsibility of the franchisee. A
certain minimum capex program is often negotiated at the time of bidding.
Capex is generally low as basic infrastructure is already in place.
Bhiwandi was the first area to be offered as DF in the country; and it is now a
successful case study for similar such models across India.
The circle was first offered in FY07 for 10 years when AT&C losses were ~45%.
TPL, backed by its operational expertise in Ahmedabad and Surat, and
institutional support, managed to reduce losses to ~18% in five years until FY12.
Bhiwandi was one of the key drivers of strong profit growth until FY12 for TPL.
However, after FY12, losses gradually mounted to ~22-25% (by FY16-17) due to:
Slowdown in the power loom industry —the major customer in Bhiwandi,
and the agitation against tariff hikes (by the DISCOM), and
The expiry of the franchisee period by end-FY17 leading to under-
investment, less focus and loss of key staff due to uncertainties.
The agreement was renewed in Jan’17 for 10 years. In the first year of operation
since renewal, AT&C losses reduced sharply to ~17% in FY18.
With uncertainty around renewal of the contract now behind and renewed
management focus we estimate reduction in AT&C losses to continue. We
expect AT&C losses to reduce to ~10% by FY22.
Renewal of agreement,
renewed focus and
improvement in health of
power loom industry driving
improvement
17.3
15.5
Bhiwandi: Uncertainties behind, renewed focus driving growth
We expect AT&C losses in
Bhiwandi to decline from
~17% in FY18 to ~10% by
FY22
Exhibit 24: AT&C losses in Bhiwandi (%)
27.2
19.5 19.3
21.7 22.7 22.4
18.0 17.9
25.0
22.3
14.0
12.0 11.0
Source: MOFSL, Company
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Agra: Capex starting to bear fruits, losses reducing
The Agra DF was awarded in 2010 for a period of 20 years. The AT&C losses
were at ~58% in 2010.
Unlike Bhiwandi, AT&C losses remained high in Agra in the initial few years.
However, over the last four-five years there has been a consistent decline in
AT&C losses, these were driven by:
Investments over the years, which have started yielding results
Under-ground laying of cables leading to less power theft
Improving institutional support
Equipment upgrade, which reduced technical losses down to the benchmarks
AT&C losses have declined from ~51% in FY13 to ~21% in FY18. We expect
losses to decline further to ~10% by FY23-24, driven by routine capex, better
thief monitoring activities and under-grounding of cables.
54.3
AT&C losses in Agra have
declined consistently over
the years as capex is
starting to yield results
Exhibit 25: AT&C losses in Agra (%)
53.6
51.3
43.5
35.9
30.8
26.8
20.9
17.0
16.5
15.5
13.5
Source: MOFSL, Company
Low-capex earnings growth
If basic level of infrastructure is in place, a distribution company can achieve
sharp loss reduction through basic analytics, better equipment upkeep, close
monitoring and better institutional support. At higher levels of losses, a DF
business is generally a high-on-service, low-on-capex business.
We believe TPL’s DF areas have potential for low-capex loss reduction.
We estimate AT&C losses in both the DFs to reduce to low single-digits by FY22-
24 on routine capex, better thief monitoring, and renewed focus.
We estimate EBITDA of DFs to increase ~8% CAGR over FY19-21E on reduction in
AT&C. We are not building in any benefit from increase in tariffs, which would
drive upside potential to our EBITDA estimates.
Bhiwandi
Agra
5.9
3.8
2.0
2.6
-0.6
FY13
1.4
2.0
-0.7
FY14
FY15
2.4
0.4
1.9
2.7
1.4
1.2
FY16
2.0
1.8
FY17
3.1
2.9
8.1
4.0
We expect EBITDA from DFs
to grow at ~8% CAGR over
FY19-21E on lower AT&C
losses in the circles
Exhibit 26: EBITDA from Bhiwandi and Agra DF (est. INR b)
6.9
3.5
7.5
3.8
3.5
3.8
4.1
FY18
FY19E
FY20E
FY21E
Source: MOFSL
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Privatization is slowly picking pace; TPL well placed to gain
Rajasthan DISCOM privatized four distribution circles in FY17 – three circles were
won by CESC and one by Tata Power. In FY19, Maharashtra DISCOM privatized two
circles – Malegaon circle was won by CESC and Shil, Mumbra & Kalwa circle was won
by TPL. All these circles were awarded on franchisee model. Odisha DISCOM is in
process of privatizing one of its distribution areas – offering the circle under then
regulated model.
We believe privatization of the distribution function will continue to gather pace as
public DISCOMs burdened with high losses and vast operating area take steps to
manage their operations. Unlike the past, the recent privatization initiatives are
dominated by the few players with wide experience in distribution function. The
recent privatization of four distribution circles in Rajasthan saw limited competition.
Three circles were won by CESC and one by Tata Power. In the Maharashtra auction
too, winners were established players.
TPL is among the few companies in India with experience in electricity distribution.
The other notable companies are Tata Power, CESC and Adani Power (with recent
acquisition of Reliance Power’s business). TPL is the only distribution company in
India, which has experience of working under both a regulated and franchisee
model. It has expertise in managing the unique issues related to operating in India
(e.g., regulatory requirements, handling value-for-money customer class, subsidized
tariff structure and unionized operating environment).
While the market potential is huge, competition is limited. Our estimates still do not
factor in the company’s advantageous position. TPL has the balance sheet strength
and considers distribution as a key growth area. Thus, we believe TPL is a well-
balanced play on the opening up of the distribution sector in India.
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Torrent Power
Renewable energy driving growth
Leveraging strong balance sheet and opportunistic deals to drive growth
TPL has renewable energy (RE, wind and solar) installed capacity of 570MW and
under construction capacity of 791MW. It ventured into RE to meet the renewable
purchase obligation for its Ahmedabad and Surat distribution circle, and is now
gradually building its portfolio as an independent producer by competitive bidding
of projects.
Feed-in portfolio generating healthy returns
As at end-FY18, installed capacity of 570MW and under-construction capacity of
50MW were under the lucrative feed-in tariff (long-term 25 years PPA).
Feed-in tariff is similar to a regulated equity model, providing assured equity
return, reimbursement of other capital and operating cost on a normative basis.
Financially and operationally strong players can generate higher equity returns
through their better-than-benchmark performance.
TPL generates significant savings from its competitive finance cost. The
normative interest cost on the feed-in portfolio is ~12% against TPL’s
consolidated interest cost of ~9-10% in FY18.
We estimate that TPL is generating high double-digit RoE (normative RoE is
~14%) on its feed-in generation portfolio.
Feed-in concept for new power projects is now done away with as the
competitive bidding route is finding favor/economics with the DISCOMs.
Building RE portfolio through opportunistic competitive bids
Installed RE capacity will
double in two years to
1.4GW (by FY21)
TPL has 791MW of under-construction wind capacity (details in Exhibit 34:).
While the tariffs on the competitively bid under-construction capacities is
sharply lower than those under the erstwhile feed-in regime (~INR4.19/kWh in
Gujarat), we estimate TPL will be able to generate equity IRR of ~12-14% on the
projects.
The lower tariff will be compensated by (a) competitive capital cost of projects
given the competitiveness in the wind turbine supplier sector – ~INR60-
65m/MW, (b) location in high-wind area, thereby generating higher PLF (the
SECI plants are located in the Kutch region of Gujarat, one of the windiest areas
in India), and (c) technological innovation, such as higher hub height of the
turbines, which would capture higher PLFs.
TPL’s competitive wind projects can generate PLF of ~40-42% due to favorable
location and higher-height wind turbines.
The projects will be commissioned in phases by FY21E and full benefit will start
to accrue from FY22E onwards.
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Exhibit 27: RE installed capacity to double in two years (MW)
Wind - FIT
Wind - Competitive
Solar - FIT
1,246
138
570
403
113
64 49
FY15
194
64
FY16
130
138
265
FY17
138
432
FY18
595
138
457
FY19E
482
FY20E
482
FY21E
626
1,361
138
741
Source: MOFSL, Company
Exhibit 28: Operating RE projects
Source: Company
Exhibit 29: Under-construction RE projects (wind)
150MW SECI I is not considered as it will be transferred to the company in FY22 under an arrangement
Source: Company
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RE EBITDA to more than double in two years on commissioning of projects
TPL installed RE generation capacity will more than double in the next three
years to 1.4GW on commissioning of new projects. Generation will increase by
73% CAGR over FY19-21E to 3.7BU.
We estimate the RE business revenue to increase at ~44% CAGR over FY19-21E
to INR12.3b. The growth in revenue is lower than the growth in generation due
to lower tariffs on the under-construction projects.
EBITDA is expected to increase by a similar ~44% CAGR over FY19-21E, more
than doubling to INR11.1b by FY21E.
RE generation will increase
by ~73% CAGR over FY19-
21E. EBITDA will increase by
~44% to INR11.1b by FY21E
on commissioning of new
projects and of recently
added projects giving full
benefits
Exhibit 30: RE generation and EBITDA
RE EBITDA - INR b
Generation - BU
2.4
0.9
1.2
3.7
0.3
0.4
1.8
FY16
2.2
FY17
4.0
FY18
5.4
FY19E
8.1
FY20E
11.1
FY21E
Source: MOFSL, Company
RE has huge potential
India’s RE (wind + solar + biomass and others) generation was ~8% of the total
generation in FY18. The government wants to increase RE’s share to ~15% by
FY22 to meet its commitment under the Paris Climate Change Agreement.
While the government’s FY22 target is ambitious, we believe that a combination
of a strong policy push and falling cost of RE should also continue to drive
opportunities in the segment.
India’s RE installed capacity has more than doubled in the last four years to
69GW in FY18. However, aggressive competition between players has not led to
much value-accretive commercial success, particularly in tenders in the last few
years. We believe that future opportunities will be huge, but commercial
success will depend on how the competition stabilizes.
TPL has experience, efficient O&M practices and a strong balance sheet (capital
support and lower interest cost) to benefit from increase in tendering for RE
projects.
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Generation: Efficient operations driving healthy RoE
RE provides some hope for idle gas plants of ~1.8GW
TPL has an installed conventional generation capacity of 3.1GW. Of this, 1.27GW is
under long-term PPAs, while the remaining 1.82GW is open capacity. Also, there is
no conventional generation capacity under construction currently. The details of the
generation assets are below:
Exhibit 31: Installed conventional generation capacity
Plant
AMGen Sabarmati
Sugen
UnoSugen
DGEN
Type
Coal
Gas
Gas
Gas
Capacity
MW
362
1,148
383
1,200
3,092
PPA
MW
362
910
0
0
1,272
Open
MW
0
238
383
1,200
1,820
Remarks
Tied-up with A'bad and Surat
Tied-up with A'bad, Surat & MP
Brownfield expansion at Sugen
Source: MOFSL, Company
Exhibit 32: Details of generation capacity
Plant
Capacity
MW
362
910
238
383
1,200
3,092
Nature
Regulated
Regulated
Open
Open
Open
Authority
GERC
CERC
Norm.
RoE
%
14.0
15.5
Capital
Cost
INR m
11,460
23,707
6,187
17,963
54,002
113,319
Capital
Cost
INR m/MW
32
26
26
47
45
37
Reg.
Equity
INR m
4,308
7,110
Norm.
Debt
INR m
238
6,165
AMGen
Sugen
Sugen
UnoSugen
DGEN
11,418
6,403
Source: MOFSL, CERC, GERC, Company
Regulated assets generating healthy returns on efficient operations
The capacity under long-term PPA is 1.27GW (AMGen 362MW and Sugen
910MW); this is under a regulated model, with normative RoE of 14% in AMgen
and 15.5% in Sugen. The regulated equity was INR11.4b in FY18.
AMGen is a ~33-year old plant. The incentive earnings are low as the actual
operating cost and performance parameters are equal to the normative. We
estimate AMGen earns only a base RoE of 14%. The plant is old, but it still
operates at a PLF of 65-75% as it is well maintained. The plant may get retired
by end-FY22 due to stricter environment norms. It is not designed to meet the
stricter sulfur dioxide emission norms, which could be effective from CY22. In
any case, we believe the company will be able to recover its invested equity by
selling the land on which the plant is located (plant located in the city) and scrap
value.
Sugen is one of the most efficient gas plants in India, and thus benefits
significantly from the favorable regulatory norms, in our view. The operating
and maintenance cost is well below the normative. The station’s heat rate is also
well below the regulator’s benchmark. We estimate that Sugen earns
significantly higher RoE than the normative 15.5% due to operating and thermal
efficiencies.
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In the past, Sugen suffered due to low domestic gas availability. With domestic
gas production unlikely to recover in the medium-term, it has started utilizing
the storage-cum-regasification capacity of Petronet LNG’s Dahej Terminal with
effect from 1
st
Apr’17. Nine LNG cargoes were imported until 31
st
Mar’18 and
another 26 LNG cargoes are contracted to be delivered by Dec’20.
Based on news reports, it has locked-in for gas in a Brent crude oil price-linked
deal – 10.5% slope to Brent for summer supplies and 13.5% slope for winter
supplies.
There is no growth capex for these plants with absence of minor capex for its
upkeep.
Higher gas prices pose some risk to earnings of Sugen
A significant portion of earnings in Sugen’s PPA capacity is driven by efficiency
incentives (in O&M cost and better plant operating parameters in terms of
station heat rate).
The station heat rate (SHR) earnings are subject to and will be volatile to the PLF
of the plant, which in turn would be influenced by the price of imported gas.
When gas prices are low, the generation cost is competitive, which drives higher
PLF. Operating parameters of the plant improves as PLF increases.
In FY18, PLF at Sugen increased from 48% YoY to 65%. We estimate the increase
in generation along with an improvement in SHR of the plant as one of the key
drivers of improvement in TPL’s FY18 earnings.
In FY14-16 when gas prices increased above USD10/mmbtu and domestic gas
was in shortage, the PLF of Sugen fell to less than 40%.
Higher gas prices and Sugen’s relative positioning on the merit order could be a
risk to SHR efficiency earnings at Sugen.
Exhibit 34: Sugen PLF and landed gas price
1,765
PLF - %
14.4
1,008
9.8
7.3
Landed gas price - USD/mmbtu
13.9
Exhibit 33: Sugen SHR savings (INR m)
1,293
999
992
744
806
76
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Est. at norm. SHR of 1,850 and actual 1,750.Source: MOFSL, Company
FY12
41
FY13
11.8
7.9
8.5
23
FY14
26
FY15
36
FY16
48
FY17
65
FY18
Gas price implied from reg. filing and est. Source: MOFSL, Company
Open capacities to remain idle; RE gives some hope
The open capacity of 1.82GW is all gas-based. There is lack of domestic gas,
while imported gas prices are not only volatile, but also exposed to movement
in currency. Hence, we believe these plants are unlikely to get into PPAs at least
over the medium-term.
The plants were set up at a time when low-cost domestic gas production was
expected to ramp up with Reliance’s KG-D6 gas block. But it did not materialize
as expected. This left a number of gas-based plants, including TPL’s
stranded/idle.
20
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Torrent Power
While we see limited opportunity for gas-plants in the near-to-medium term,
the intense focus on RE in India could provide some opportunity for gas plants
over the long term for their quick ramp-up and ramp-down ability.
Prices on power exchanges in India during the evening peak hours are rising
sharply than the increase in non-peak pricing. As RE penetration rises, this trend
could become even sharper.
Gas-based plants have significantly lower fixed cost than coal-based plants,
which makes it economical to provide peaking power support.
Share of idle assets in portfolio declining
At its peak in FY15, open gas capacities formed ~41% of the consolidated gross
block. The upkeep cost, depreciation and finance cost impacted earnings and
RoE.
Over time, with growth in invested capital (into other return generating
businesses), the contribution and impact of these un-utilized open gas capacities
reduced to ~32% in FY18 and is likely to reduce further to ~24% by FY21E.
Exhibit 35: Gross block of open gas assets as % of consolidated gross block
41
40
36
32
30
25
24
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Consol. gross block is adj. for INDAs restatement.
Source: MOFSL, Company
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Growth engine back on track
~80% of EBITDA driven by stable and predictable segments
~80% of EBITDA driven by stable and predictable segments
TPL’s growth engine is 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.
~80% of TPL’s EBITDA is driven by the stable and predictable segments of
regulated distribution/generation and RE.
We expect EBITDA/PAT to increase by CAGR of ~12% over FY19-21E to
INR40.8b/INR13.3b, respectively, driven by RE, DF and steady growth in the
regulated distribution business.
Exhibit 37: ~80% EBITDA from stable/predictable segments
Reg. distribtion
% EBITDA
17
13
34
36
20
16
31
32
FY19E
20
27
22
31
FY21E
Source: MOFSL, Company
Reg. generation
RE
Others (incl. DF)
Exhibit 36: EBITDA CAGR of ~12% over FY19-21E (INR b)
36.6
40.8
30.6
20.8
13.5
12.8
24.6
31.2
32.8
FY13
FY14
FY15
FY16
FY17
FY18 FY19E FY20E FY21E
Source: MOFSL, Company
FY18
Exhibit 38: PAT CAGR of ~12% over FY19-21E (INR b)
13.3
9.0
9.4
10.6
11.1
Exhibit 39: RoE to remain stable (%)
RoE - %
13.8
12.9
13.0
12.5
13.5
3.9
1.1
FY13
FY14
3.6
4.3
6.5
1.7
5.6
6.4
FY15
FY16
FY17
FY18 FY19E FY20E FY21E
Source: MOFSL, Company
FY13
FY14
FY15
FY16
FY17
FY18 FY19E FY20E FY21E
Source: MOFSL, Company
Operating cash generation steadily improving
We expect operating cash flow (OCF) generation to steadily improve. We expect
OCF to increase from ~INR28b in FY18 to ~INR36b by FY21E.
OCF will be used to fund capex for RE capacity addition. FCF generation, thus,
will remain low.
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Exhibit 40: Operating cash flow steadily improving (INR b)
Operating CF
Operating CF (pre WC)
28.6
30.0
33.1
36.6
26.0
18.8
12.5
15.7
FY13
13.1
13.5
FY14
22.5
FY15
25.5
FY16
23.9
24.2
FY17
27.6
FY18
29.4
FY19E
32.8
FY20E
36.3
FY21E
Source: MOFSL, Company
Exhibit 41: Capex intensity to increase (INR b)
35.5
24.5
14.6
13.8
13.1
22.9
14.5
35.6
32.7
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
Source: MOFSL, Company
Low leverage provides strong base for growth
TPL has historically maintained a very low leverage ratio. The net debt to equity
has never exceeded ~1.2x despite the capex phase and unutilized assets. The
net debt to EBITDA increased to ~5x for a brief period in FY13 and FY14 (due to
abnormally low earnings), but otherwise has remained below ~3x.
We expect the leverage ratios to remain comfortable even as capex momentum
is expected to increase. While gross block and net block is expected to increase
by ~INR86b and ~INR46b, net debt is expected to increase by only ~INR20b over
FY18-21E, on strong operating cash flow generation.
We expect net debt to equity to remain steady despite the higher capex, at ~1x.
~80% of cash flows/operating profit is fairly predictable and secured. Torrent
Power can comfortably increase leverage giving the company a strong base for
future growth.
TPL has one of the most comfortable balance sheets amongst the private sector
power players, but the company is still earning RoE similar to competitors. It is
very well placed with experience across the power sector value chain –
distribution, conventional generation and RE – to capture potential growth
opportunities.
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Exhibit 42: Net debt to Equity comfortable despite increase in capex (x)
Net debt - INR b
1.1
0.8
0.8
0.5
23
26
19
0.5
24
46
66
70
70
72
78
83
99
113
103
0.8
1.1
1.1
Net debt to Equity - x
1.1
1.1
1.1
1.2
1.2
1.0
Source: MOFSL, Company
Return ratios best amongst the private sector players
TPL’s RoIC is amongst the best in the private power sector space and only
marginally lower than the regulated business of public sector companies like
NTPC and Power Grid.
This, despite no contribution from the unutilized gas plants (~25% of gross block
by FY21E, adjusting for which RoIC will be ~12% in FY21E). These gas plants have
a future, in our view, but the timing is uncertain.
Exhibit 43: RoIC (pre-tax, %) – best amongst private power sector
TPL
15
13
11
9
7
TPWR
CESC
JSWE
NTPC
PWGR
Source: MOFSL, Company
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Torrent Power
Valuation
Initiate with TP of INR315/share, with a Buy rating
We value TPL using SOTP due to the different nature of its various businesses.
Valuation attractive; Initiate with Buy
TPL has one of the best balance sheets in private power sector. Presence in different
segments of the sector provides it a strong base for future growth. Its 1.8GW of gas-
based generation capacity, representing ~32% of gross block, is unutilized due to
lack of economics of gas-based power generation. We are not building in any benefit
for the same, but believe that with rising RE penetration in India, it could become
valuable at some juncture. Excluding the drag of these unutilized assets, TPL’s RoIC
is amongst the best in industry. We value the stock on SOTP basis at INR315/share,
upside of 20%. The stock is attractive trading at ~1.2x FY21E P/BV due to a healthy
balance sheet, option value of gas plants and strong industry positioning. We initiate
on the stock with a ‘Buy’ rating.
Regulated business – distribution:
This segment is a fairly predictable cash flow
business with steady growth. Regulated equity is the key driver of earnings. We
value it as a multiple to the regulated equity base. We assume core RoE of 16%
(base RoE of 14% + incentives) and growth rate of 6% over the long-term.
Regulated business – generation:
The cash flows are predictable, but growth in
existing assets is unlikely. Regulated equity is the key driver of earnings. It is also
valued as a multiple to the regulated equity base. We assume the respective
base RoE of the plants (14% or 15.5%) but do not give any value to growth.
Renewable energy:
The cash flow of the existing business portfolio is fairly
certain. We value the business at 8x EV/EBITDA.
Distribution franchisee:
The businesses are volatile, unlike the regulated and
the RE business. We value it at 6.5x EV/EBITDA.
Sugen’s efficiency earnings:
Sugen is ~79% under PPA, but the plant earns
higher returns than the normative due to its efficient operations and favorable
regulatory norms. We value these efficiency earnings at ~6x EV/EBITDA as they
can be volatile.
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 Motilal Oswal Financial Services
Torrent Power
Exhibit 44: Target price calculation on FY21 basis
Reg. E
Equity
INR m
48,981
21,065
6,961
9,330
4,515
7,110
EBITDA
INR m
11,096
8,115
2,801
RoE
%
Growth
%
Multiple
x
(RoE-g)/(CoE-g)
1.8
1.8
@90%
1.0
1.3
Equity
Value
INR m
72,951
37,955
12,542
8,397
4,515
9,542
Norm.
Debt
INR m
23,106
17,365
3,365
0
0
2,377
EV
INR m
96,057
55,320
15,907
8,397
4,515
11,919
Regulated businesses
Distribution
Ahmedabad
Surat
Regulatory assets
Generation
Sabarmati
Sugen
Others businesses
RE projects
Bhiwandi and Agra DFs
Sugen PPA efficiency earnings
Others
EV
Less: Net debt
MCap
No. of shares
Value per share
16.0
16.0
6.0
6.0
14.0
15.5
0.0
0.0
8.0
6.5
6.0
88,771
52,746
16,806
254,380
103,167
151,213
481
315
Source: MOFSL, Company
We do not ascribe any value to the unutilized gas capacity of 1.82GW. While we
believe gas plants will have a future as RE penetration increases in India, the
likelihood in near-to-medium term is low. Assuming these gas plants eventually get
utilized for peaking power support, able to run at ~20% PLF and earn a contribution
margin of ~INR0.5-1.5/kWh, the potential value could be ~INR22-67/share.
Exhibit 45: Potential value of an unutilized gas capacity of 1.82GW
Contribution margin
Merchant-gas capacity
Sugen
Unosugen
Dgen
Generation
PLF
Variable cost of gen.
LNG FoB price
In-land trans./conversion/others
Landed cost of LNG
USDINR
Mark-up on variable cost
Revenue per unit
Incremental contribution margin
O&M cost
Incremental EBITDA
Tax @ of 25%
Incremental PAT
Potential value @ 10x PE
Potential value @ 10x PE
INR/kWh
MW
0.50
1,820
238
383
1,200
3,189
20.0
4.73
7.2
2.0
9.2
70
0.50
5.23
1,594
159
1,435
359
1,076
10,762
22
1.50
1,820
238
383
1,200
3,189
20.0
4.73
7.2
2.0
9.2
70
1.50
6.23
4,783
478
4,305
1,076
3,228
32,285
67
MU
%
INR/kWh
USD/mmbtu
USD/mmbtu
USD/mmbtu
x
INR/kWh
INR/kWh
INR m
INR m
INR m
INR m
INR m
INR m
INR/sh.
Source: MOFSL, Company
19 March 2019
26
 Motilal Oswal Financial Services
Torrent Power
Key risks
Higher imported gas prices
would impact the PLF of its gas plant under long-
term PPA, thereby impacting earnings driven by thermal efficiency of the plant.
Lower PLF in new wind capacities:
The equity IRR on wind power plants under
construction is subject to achieving the projected PLF of 40-42%. Torrent
believes it would be able to achieve such high PLF based on the location of the
plant, technology developments over the years and a higher hub height.
Slower-than-expected pace of reduction on AT&C losses in the DF area:
DF
business’ profitability is driven by reduction in AT&C losses. Losses in TPL’s DF
areas have scope for significant loss reduction (in Ahmedabad and Surat its
losses are sub-7%, against losses in DFs of upwards of 15%). A slower-than-
expected reduction in AT&C losses in DFs would impact earnings.
19 March 2019
27
 Motilal Oswal Financial Services
Torrent Power
SWOT analysis
Stable and predictable cash flows with no input price risk
Present across the value chain in power sector from
distribution to generation
Healthy balance sheet to capture growth opportunities in
distribution privatization, RE and consolidation in conventional
generation
Strength
Regulated distribution and generation subject to regulatory
oversight, capping return potential
Lack of availability of economical domestic gas exposes to
imported LNG
Weaknesses
Privatization of distribution in India; TPL is amongst the few listed
private sector companies with experience in distribution function
In-organic opportunities in conventional generation given TPL's
strong balance sheet
Ambitious renewable energy generation targets would provide
growth opportunities
Opportunities
Threats
Distribution generation along with falling cost of storage
could reduce reliance on grid supply, impacting growth
Changes in regulations
License renewal risk for its distribution circles
19 March 2019
28
 Motilal Oswal Financial Services
Torrent Power
Management team
Mr. Jinal Mehta, Managing Director
Mr. Jinal Mehta holds a Bachelor of Business Studies (BBS) and Master of Business
Administration (MBA) degree in International Business and Finance. He has more
than twelve years of experience in the power sector. Mr. Mehta was involved in the
implementation of 1,147.5 MW SUGEN Mega Power Project and subsequently
shouldered the responsibility of its operations as its COO. He was also involved in
the implementation of 382.5 MW SUGEN Expansion (i.e. SUGEN 40) and
subsequently was responsible for implementation of the DGEN Mega Power Project
(1200 MW). Prior to taking over as Managing Director of Torrent Power w.e.f. 1
st
Apr’18; he was responsible for the distribution business of the company for a period
of four years.
Mr. Sanjay Dalal, Chief Financial Officer
Mr. Sanjay Dalal is a Chartered Accountant and graduate in law. He has varied and
rich experience of 33 years in power, pharmaceuticals and textiles. He has been
associated with the Torrent Group from 2000 onwards. During his association with
the Torrent Group, he was involved mainly with the pharmaceutical business and
power generation business in multifarious roles covering business operations and
finance. As Executive Director, Mr. Dalal was involved in the generation operations
and procurement of gas. He has wide knowledge in the areas of accounting, finance,
taxation, restructuring, etc.
19 March 2019
29
 Motilal Oswal Financial Services
Torrent Power
Financials and valuations
Income Statement
Y/E March
Net Sales
Change (%)
Total Expenses
EBITDA
% of Net Sales
Depn. & Amortization
EBIT
Net Interest
Other income
PBT before EO
EO income/(cost)
PBT after EO
Tax
Rate (%)
Reported PAT
Minority and Associates
Adjusted PAT
Change (%)
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Minority Interest
Total Loans
Deferred Tax Liability
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Goodwill
Investments
Curr. Assets
Inventories
Account Receivables
Cash and Bank Balance
Others
Curr. Liability & Prov.
Account Payables
Provisions & Others
Net Curr. Assets
Appl. of Funds
2015
103,960
19.8
83,161
20,799
20.0
7,205
13,594
9,623
3,662
7,634
-230
7,404
3,777
51.0
3,627
30
3,367
219.9
2016
117,158
12.7
86,542
30,616
26.1
9,157
21,459
11,308
2,819
12,970
-74
12,896
3,874
30.0
9,022
20
8,928
165.2
2017
100,536
-14.2
75,933
24,603
24.5
10,059
14,544
10,580
1,909
5,873
0
5,873
1,576
26.8
4,298
8
4,290
-52.0
2018
115,121
14.5
83,950
31,171
27.1
11,315
19,856
8,482
2,636
14,010
0
14,010
4,489
32.0
9,521
98
9,423
119.7
2019E
133,542
16.0
100,740
32,803
24.6
12,228
20,575
9,298
2,100
13,376
0
13,376
2,809
21.0
10,567
8
10,559
12.1
2020E
138,381
3.6
101,747
36,634
26.5
13,508
23,126
10,714
2,205
14,617
0
14,617
3,508
24.0
11,109
8
11,100
5.1
(INR Million)
2021E
143,594
3.8
102,764
40,829
28.4
14,773
26,056
10,902
2,315
17,469
0
17,469
4,193
24.0
13,277
8
13,268
19.5
(INR Million)
2021E
4,806
98,665
103,472
384
110,981
14,799
229,636
294,793
70,972
223,821
3,925
0
1,923
42,591
5,508
13,769
7,814
15,500
42,624
9,601
33,023
-33
229,636
2015
4,725
60,832
65,557
308
93,547
8,579
167,990
186,848
36,065
150,782
2,330
100
37
43,076
2,597
8,924
23,732
7,823
28,338
6,339
21,999
14,738
167,987
2016
4,806
59,898
64,705
301
85,148
13,061
163,215
160,461
9,166
151,295
2,133
100
50
42,540
4,202
10,570
12,856
14,912
32,902
9,520
23,382
9,637
163,215
2017
4,806
64,115
68,921
289
87,681
13,363
170,255
187,266
19,226
168,040
3,321
0
66
36,559
3,694
9,751
9,336
13,778
37,731
9,054
28,677
-1,172
170,255
2018
4,806
72,389
77,195
359
92,981
14,799
185,334
209,170
30,463
178,707
3,925
0
1,923
41,335
4,549
11,305
9,982
15,500
40,556
7,534
33,023
779
185,334
2019E
4,806
80,064
84,871
368
106,981
14,799
207,018
224,503
42,691
181,811
24,044
0
1,923
41,258
5,122
12,805
7,830
15,500
42,018
8,996
33,023
-760
207,018
2020E
4,806
88,281
93,087
376
120,981
14,799
229,243
280,255
56,199
224,056
3,925
0
1,923
41,648
5,308
13,269
7,572
15,500
42,310
9,287
33,023
-661
229,243
19 March 2019
30
 Motilal Oswal Financial Services
Torrent Power
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE (post-tax)
RoIC (post-tax)
Working Capital Ratios
Fixed Asset Turnover (x)
Asset Turnover (x)
Debtor (Days)
Inventory (Days)
Leverage Ratio (x)
Net Debt/EBITDA
Debt/Equity
2015
7.1
22.4
138.8
1.5
21.0
2016
18.6
37.6
134.6
6.0
32.3
2017
8.9
29.9
143.4
0.0
0.0
2018
19.6
43.1
160.6
2.2
11.2
2019E
22.0
47.4
176.6
5.0
22.8
2020E
23.1
51.2
193.7
5.0
21.6
2021E
27.6
58.3
215.3
5.0
18.1
22.9
7.3
1.2
7.1
12.5
6.2
1.7
6.0
25.8
7.7
1.6
7.7
0.0
11.7
5.3
1.4
6.2
1.0
11.9
5.5
1.5
6.9
1.9
11.3
5.1
1.3
6.5
1.9
9.5
4.5
1.2
5.6
1.9
5.3
6.9
7.7
13.7
9.8
9.9
6.4
6.6
6.3
12.9
8.4
8.1
13.0
8.8
9.1
12.5
8.8
9.0
13.5
9.4
9.2
0.7
0.6
31
9
3.4
1.1
0.8
0.7
33
13
2.4
1.1
0.6
0.6
35
13
3.2
1.1
0.6
0.6
36
14
2.7
1.1
0.7
0.6
35
14
3.0
1.2
0.6
0.6
35
14
3.1
1.2
0.6
0.6
35
14
2.5
1.0
(INR Million)
2021E
40,829
-386
0
-4,193
36,251
-14,538
21,713
2,315
0
0
-12,223
0
-10,000
-10,902
-2,884
0
-23,786
242
7,572
7,814
Cash flow statement
Y/E March
EBITDA
WC
Others
Direct taxes (net)
CF from Op. Activity
Capex
FCFF
Interest income
Investments in subs/assoc.
Others
CF from Inv. Activity
Share capital
Borrowings
Finance cost
Dividend
Others
CF from Fin. Activity
(Inc)/Dec in Cash
Opening balance
Closing balance (as per B/S)
2015
20,799
3,759
-847
-1,197
22,514
-12,575
9,939
1,482
-13
161
-10,945
0
-1,190
-11,694
-321
1,149
-12,055
-486
24,218
23,732
2016
30,616
-534
-1,412
-3,167
25,503
-16,349
9,155
1,410
-13
202
-14,750
0
-8,055
-11,818
-3,442
1,686
-21,629
-10,876
23,732
12,856
2017
24,603
236
385
-1,056
24,168
-21,745
2,423
732
-16
113
-20,916
0
2,442
-10,334
-62
1,182
-6,771
-3,520
12,856
9,336
2018
31,171
-922
586
-3,200
27,635
-23,866
3,769
771
-17
-763
-23,875
0
5,276
-8,285
-1,310
1,205
-3,114
646
9,336
9,982
2019E
32,803
-612
0
-2,809
29,382
-35,451
-6,070
2,100
0
0
-33,351
0
14,000
-9,298
-2,884
0
1,818
-2,152
9,982
7,830
2020E
36,634
-358
0
-3,508
32,768
-35,634
-2,866
2,205
0
0
-33,429
0
14,000
-10,714
-2,884
0
402
-259
7,830
7,572
19 March 2019
31
 Motilal Oswal Financial Services
REPORT GALLERY
RECENT INITIATING COVERAGE REPORTS
.
Rs
 Motilal Oswal Financial Services
Torrent Power
Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>=15%
SELL
< - 10%
NEUTRAL
< - 10 % to 15%
UNDER REVIEW
Rating may undergo a change
NOT RATED
We have forward looking estimates for the stock but we refrain from assigning recommendation
*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within
following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.
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Regulations, is engaged in the business of providing Stock broking services, Investment Advisory Services, Depository participant services & distribution of various financial
products. MOSL is a subsidiary company of Motilal Oswal Financial Service Ltd. (MOFSL). MOFSL is a listed public company, the details in respect of which are available on
www.motilaloswal.com.
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19 March 2019
33
 Motilal Oswal Financial Services
Torrent Power
****************************************************************
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of MOSL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature.
The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty,
representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The
report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial
instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. MOSL will not treat recipients as
customers by virtue of their receiving this report.
Disclaimer:
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or
distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for
informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing
in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances.
The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this
document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this
document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views
expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade
securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of
the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and
should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make
modifications and alternations to this statement as may be required from time to time without any prior approval. MOSL, its associates, their directors and the employees may from
time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to
perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a
separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of
information that is already available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and the Company may or
may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on,
directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or
entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law,
regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all
jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither
the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue
or lost profits that may arise from or in connection with the use of the information.
The person accessing this information specifically agrees to exempt MOSL or any of its affiliates
or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or employees responsible for any such misuse
and further agrees to hold MOSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing
this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980
4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080
1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com,
Contact No.:022-38281085.
Registration details: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412.
AMFI: ARN 17397. Investment Adviser: INA000007100. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual
Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd.
is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. *Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate
products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products.
* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National
Company Law Tribunal, Mumbai Bench. The existing registration no(s) of MOSL would be used until receipt of new MOFSL registration numbers.
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