Torrent Power: SELL. Still short of fuel

The stock of Torrent Power surged earlier this month on hopes of securing subsidised imported gas, the result of government-conducted gas e-auctions. But these gains did not sustain. This may be due to the temporary and partial nature of the relief which companies with stranded gas-based capacities stand to derive from the auctions.

Torrent Power runs close to 84 per cent of its 3,253 MW generation capacity on gas. This includes the 1,530 MW plant at Surat and the 1,200 MW plant at the Dahej special economic zone (SEZ). But a large part of it has turned inoperative due to shortage of domestic gas.

The company, a successful bidder in the recent auction, can now hope for some relief — it will be supplied imported gas at below-market prices during June-September 2015 to run its plants at higher capacity. The power thus generated will be sold to state distribution utilities at ₹5.14-₹6.12 per unit, which includes a contribution of ₹1.42-₹1.75 per unit from the government. The revenue generated from these power sales can be used to meet fuel expenses for plants that are operating below capacity (under 35 per cent) and fuel expenses plus fixed costs for stranded plants. Also, at ₹161, the stock of Torrent Power trades at 14 times its consolidated earnings for 2015-16, which is lower than its five-year average valuation of about 18 times.

Still, investors can consider selling the stock of Torrent Power. One, though the gas supply should facilitate an increase from the current operational capacity levels, the benefit from subsidised fuel will be only to the extent of up to 35 per cent capacity utilisation. Second, the amount received from the government can be used for meeting only certain costs, ensuring only partial cost recovery. Most importantly, the company cannot earn any return on equity on any of these plants.

Also, while more auctions will be conducted in future, the benefits stand capped. One, the government support in the form of cheaper gas supply and part-payment for the power produced is only available during the current fiscal and the next. Also, the total amount of support has been fixed at ₹3,500 crore for 2015-16 and ₹4,000 crore for 2016-17 for the entire sector.

While the subsidised gas supply is a palliative, the company’s overwhelming dependence on the fuel makes adequate availability of domestic gas crucial for its long-term viability. But, with domestic gas producers lacking incentive to increase output at existing prices, production may not see a big jump.

Capacity utilisation at Torrent Power’s 1147.5 MW plant at Surat has shrunk from 83 per cent in 2010-11 to 26 per cent in 2014-15 for want of gas. The 382.5 MW plant (expansion of the Surat plant) has failed to produce power since its completion. So has the 1,200 MW plant at the Dahej SEZ since its commissioning in December. The subsidised gas allocation can improve capacity utilisation at these plants, but only partially.

Torrent Power, which is also into distribution, has been forced to buy expensive power from outside sources for supply to its distribution network. Approval by the Gujarat Electricity Regulatory Commission (GERC) of a revised formula in October 2013 for tariff adjustment to provide for the higher power purchase costs of the company’s distribution business has however, provided some relief.

Torrent Power, which saw its net profit shrink from ₹1,253 crore in 2011-12 to ₹105 crore in 2013-14, however posted higher net profit of ₹360 crore in 2014-15. But this was thanks to tariff hikes allowed by the GERC to enable better recovery of costs incurred by distribution companies in the previous year.

With the company’s plants now set to operate at higher levels than before, it can look forward to recouping a part of the costs incurred. But with the power produced from subsidised gas mandated to be supplied at prices that do not account for a return on equity, a sustained growth in company earnings does not seem likely.

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