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JM Financial Services
Torrent Power (Buy)
CMP: ₹290
Target: ₹360
Torrent Power is one of the most well-diversified Indian power utilities companies with operations spanning generation, transmission and distribution. We estimate Torrent Power’s historic profit mix to come a) 50 per cent from the Bhiwandi/Agra franchise businesses; and b) 60-65 per cent from its regulated businesses at Ahmedabad/Surat distribution and Sugen/Amgen generation plants. However, these profits have been offset by recurring losses (₹750-800 crore) at its stranded gas plants (Unosugen/Dgen) from fixed-cost under-recovery given lack of PPAs. However, with falling gas prices, the Unosugen plant has been awarded a 19-year PPA with tariffs capped at ₹4.41/kWh (details on Pg 5), thus negating this plant’s loss, implying an ₹180-200 crore addition to FY20 profits. With government efforts on pooled gas PPAs there is potential of further loss reduction (₹500 crore at Dgen plant) that we do not factor in.
Barring the loss reduction, Torrent Power’s regulated distribution/franchise business grows at a stable 10-12 per cent with potential upside merchant sales in a low gas price regime (150 MW gas booked at USD 4/mmbtu).
We do not factor any benefit of Dgen loss reduction and assume gas prices of USD 6/mmbtu and yet find profit CAGR of c.25 per cent in FY19-21, while the stock trades at 1.2x FY22E BV. We value the business on an SOTP basis to arrive at a Base Case fair value of ₹360/share (17 per cent upside).
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