22 February 2021
Company Update | Sector: Utilities
TP: INR437 (+15%)
Expanding its distribution presence
Torrent Power (TPW) has emerged as the highest bidder for the acquisition
of 51% stake in Distribution companies (DISCOMs) of the Union Territories
of Daman & Diu and Dadra & Nagar Haveli. The takeover would be subject
to completion of certain formalities, as per the management.
The move does not catch us by surprise and is in line with the
management’s strategy of increasing its presence within the Distribution
space. With a healthy Balance Sheet (net debt-to-equity less than 1x) and
strong expertise, the company is well armed to capitalize on privatization
opportunities within this space.
Media reports suggest TPW’s bid of INR5.55b for the acquisition. Based on
the current regulated equity base of the two DISCOMs and regulated RoEs
of 16%, the bid appears on the higher side. We await clarity on the same.
The company has been an efficient operator in its existing circles in Gujarat,
with a strong reduction in AT&C losses and ability to generate returns
higher than regulated RoEs.
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
175.3 / 2.4
385 / 240
Financials & Valuations (INR b)
2020 2021E 2022E
136.4 134.5 140.7
35.6 32.7 37.8
13.5 10.8 14.9
EBITDA Margin (%)
26.1 24.3 26.9
Adj. EPS (INR)
28.0 22.6 30.9
EPS Gr. (%)
49.7 -19.4 37.1
190.5 208.9 231.6
14.9 11.3 14.0
41.4 28.8 26.7
9.7 16.8 12.2
Div. Yield (%)
FCF Yield (%)
Shareholding pattern (%)
FII Includes depository receipts
Stock Performance (1-year)
Sensex - Rebased
Steady circles with less than 10% T&D losses and 4-5% demand growth
A look into the tariff filings indicate a steady circle – albeit with a high
industrial mix (over 90%). Aggregate T&D losses have been consistently
below 10% over the past five years. Demand in the two circles (including OA
sales) has risen by 4-5% CAGR.
Regulated RoEs stand at 16%, with gross fixed assets rising by 7% CAGR over
the past five years.
The pace of capitalization/regulated equity has seen some slowdown in
recent years. However, this could be due to some lumpy projects as capex
during the timeframe has been considerably higher.
Await details on the transaction
Media articles (see
indicate that the company has bagged 51% stake
for INR5.55b. Given the: a) current regulated equity of INR2.2b in the two
circles, b) assuming a growth of 5-6%, and c) regulated RoEs of 16%, the bid
appears to be high, implying a value of 4.9x regulated equity.
However, clarity on this and details of its plan for the circles (initial
regulated equity base, capitalization growth and its funding, and AT&C
norms) are awaited. TPW has been an efficient operator in its existing
circles. Over the years, it has been able to reduce AT&C losses and earn
RoEs of ~16% at its Distribution licenses (v/s base RoEs of 14%).
We do not bake these into our estimates, with the actual takeover yet to take
place. Over the past few months, TPW has been taking consistent steps
towards leveraging its expertise (as well as Balance Sheet) within the
Renewable and Distribution space. While we keep a keen eye on details and
value accretion from these projects, the medium term story for existing
businesses remains intact. Demand and collections at its Distribution franchise
has recovered, and profitability is expected to bounce back in FY22. Its gas
plants remain well placed, with gas tie ups and the recent offtake of Unosugen
PPA. Continued capitalization within regulated Distribution would continue to
aid earnings. Maintain Buy with a SoTP based TP of
Aniket Mittal – Research Analyst
13 February 2020
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.