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Power Surge

Torrent Power, an integrated power company, deserves to be a part of your portfolio

Torrent Power is an integrated player that both produces and distributes power. Some of the cities where it distributes power are Ahmedabad, Gandhinagar, Surat, Bhiwandi and Agra. It has a total production capacity of 1.6 GW, of which 0.4 GW is thermal power and the rest 1.2 GW is gas-based. It is in the process of adding another 1.6 GW of capacity by adding to the capacity at Sugen and by setting up new units at Dahej SEZ (special economic zone).

Sector outlook
Currently India has generation capacity of 1,74,000 MW of power. Its per capita consumption of electricity is only around 715 units whereas the global average is 2,600 units. The country faces peak time power shortage of nearly 14 per cent. The demand for power is expected to grow at the rate of 7.05 per cent over the next 10 years. So there is a lot of scope for the power sector to grow.
It is expected that India will actually add about 55,000 MW capacity in the 11th five-year plan. It plans to add another 1,00,000 MW of capacity in the 12th plan.

While the opportunities are immense, the sector also faces a number of impediments. In recent times, the price of coal, a key input (90,000 MW of the total generation capacity of 1,74,000 MW is coal-based), has gone up. While the demand for coal has gone up (due to new private players entering the sector), supply has not increased commensurately. Players are forced to import coal, which is three times more expensive than domestically produced coal.
Moreover, the state electricity boards (SEBs), which are in dire financial straits, have reduced their offtake of power from private producers. Players that are more dependent on the sale of merchant power have been especially affected. Another problem that the power sector faces is that of financing. Rising interest costs have made it difficult for projects to achieve financial closure.

Strengths
Integrated business model. The company is both a producer and distributor of power. At present, power producers face a number of issues: obtaining coal linkage; rising price of coal, ban on coal mining by the Ministry of Environment and Forests in areas designated as “no-go areas”, and so on. In case of a player like Torrent Power, the risks get diversified away because of its integrated business model.
Moreover, a player that is only into the production of power is dependent on state electricity boards for sales. And as we said, many state electricity boards are running huge losses (their cumulative losses amount to `70,000 crore annually) and have reduced offtake. An integrated player engaged in both production and distribution of power has the advantage that it is not entirely dependent on state electricity boards for sale of the power since it also distributes what it produces.
Gas-based plants. About 75 per cent of the capacity that the company possesses comes from gas-based plants. These are more efficient than either coal- or oil-based plants.
Low transmission and distribution losses. The company’s transmission and distribution (T&D) losses are much lower compared to the all-India average. In circles like Ahmedabad, Gandhinagar, and Surat, where the company has been distributing power for quite some time, its T&D losses were 7.23 per cent in FY11, much lower than the national average of above 25 per cent.
Long-term power purchase agreements. For more than 90 per cent of the power that Torrent produces, it has entered into long-term power purchase agreements (PPA). Hence its revenue is likely to be steady from year to year, unlike that of players who are more dependent on sale of merchant power (in this segment, power is sold at spot rates, which tend to fluctuate).
Efficient producer and distributor. The company has a high plant load factor (PLF, a measure of a power plant’s operational efficiency). Its plants have a PLF of above 90 per cent against the national average of 78 per cent.
No exposure to Chinese equipment. In recent years, many power producers purchased BTG (boiler, turbine, generator) equipment from Chinese manufacturers. Many of them are now discovering that Chinese equipment has higher average downtime and higher lifetime cost. Torrent refrained from purchasing equipment from the Chinese. This is expected to help the company maintain its current high level of operational efficiency.

Risks and concerns
Fuel-related concerns. Most of Torrent Power’s gas requirement is met through a tie-up with Reliance Industries. The latter’s inability to augment production at KG-D6 Basin (in line with earlier projections) is likely to have a negative effect on Torrent. It could result in a lower plant load factor and also prevent the company from fully capitalising on the opportunity in the merchant power segment. There is, however, hope that with Reliance’s sale of stake in the basin to BP, the latter may be able to help augment production.
No fuel tie-up for upcoming capacity. Of the total capacity of 1.6 GW that the company plans to add, 1.5 GW will be gas-based. All this new capacity is expected to become operational by FY14. So far, however, there is no fuel linkage (assured supply of fuel) for these projects, which is a major source of concern. Even after the plants have been set up, there could be a delay before they become operational owing to the lack of fuel linkage.
The next round of domestic gas repricing is likely to happen in FY14. In all probability, the company will be able to achieve fuel linkage only after this repricing exercise. Analysts are of the opinion that after the repricing, the price of natural gas will go up to at least $5.5 per MMBTU (international price of gas will be factored in). It is expected that this higher price will result in a higher supply response.
Rising cost of fuel. The cost of fuel has increased for most power producers in recent times, and Torrent Power is no exception. In FY11, its cost of fuel increased 24 per cent year-on-year, one, due to an increase in the volume of fuel purchased (owing to a 10 per cent increase in the amount of electricity generated), but also due to an increase in cost of coal. This was due to greater reliance on imported coal.

Growth opportunities
Growth in power consumption. In the licence areas where it supplies power, electricity consumption is growing annually at the rate of 4-5 per cent annually, which will help augment the company’s revenue.
Capacity addition. The company is in the process of adding another 1.6 GW of capacity. It has given the EPC contract for the 1,200 MW gas-based power project at Dahej SEZ and for a 382.5 MW gas-based plant at Sugen to Siemens. In FY11 it incurred an expenditure of `1,300 crore on capacity expansion.
Foray into renewable energy. The company is developing a 44 MW wind power project. It has signed an agreement with Enercon for commissioning this project at Lalpur in Jamnagar district of Gujarat.
MoU for power plant in UP. The company has signed a memorandum of understanding with the UP government for setting up a 1,320 MW coal-based power plant at Sandila in Hardoi district of Uttar Pradesh.
Scope for reducing T&D losses. In the older circles where it distributes power (Gandhinagar, Ahmedabad, and Surat), the company has among the lowest levels of T&D losses in the country (around 7.5 per cent). In the Bhiwandi circle, the company has reduced T&D losses from 60 per cent to 17.95 per cent over the last four years. In Agra, T&D losses stood at 53.6 per cent in FY11, the first year of operation. Analysts are optimistic that Torrent will in future succeed in bringing down the T&D losses in this circle.
Privatisation of distribution. Many state electricity boards (SEBs) across the country are in dire straits financially. The government is keen on privatising power distribution in more cities. Since Torrent has been in the distribution business for a long time and is among the most efficient players, it has a lot of scope for growth.

Financials
Over the past four years, it has managed to increase its revenue at a compounded annual growth rate (CAGR) of 47.14 per cent, and its profit after tax (PAT) at a very high rate of 95.84 per cent (albeit from a small base of Rs 71.76 crore).
Its debt to equity ratio had come down to 0.84 by the end of FY 11. This ratio has been declining over the past two years.
The company’s PBIDT margin stood at 33.25 per cent while its profit after tax margin stood at 16.18 per cent for FY11. Both these ratios have been rising for the last four years. Its return on equity stood at an attractive 24.15 per cent for FY11.

Valuation
The company is trading at a 12-month trailing price-to-earnings (P/E) ratio of 9.72. This is 26.95 per cent lower than its three-year median PE of 13.31.
Over the past three years, the company’s earnings per share (EPS) has shown a CAGR of 37.93 per cent. This gives it a price-earnings to growth (PEG) ratio of 0.24. You may invest in the stock with at least a three-year investment horizon.