Stock Pick From The Power Sector

Here Is Why:

• Positive developments on the feedstock availability front would be a major growth driver.
• An expected turnaround in the Agra region will add to its bottomline.
• Not a single share is pledged despite the high amount of debt, clearly indicating a conservative management style.
• Its operational efficiency and a strong balance sheet are an added advantage.

It is rare to see a company making losses being recommended as an investment pick. However, its losses notwithstanding, Torrent Pharma (TPL) is one of the worthwhile companies in the power sector on almost all the metrics one needs to evaluate. The company scores high in terms of operational efficiency, promoters’ stance, balance sheet and cash flow generation. Also commendable are its transmission & distribution (T&D) loss levels and its 40 year-old units operating at phenomenal plant load factors (PLF) of more than 90 per cent. It is one the best run power companies operationally, and hence, despite the losses, we recommend buying the scrip at the current levels.

TPL has a generation capacity of 1647.5 MW and distributes power to more than three million customers annually in Ahmedabad, Gandhinagar, Surat, Bhiwandi and Agra. However, the company has been plagued by various issues like that of coal supply, gas allocation, regulatory confusion and the absence of a clear-cut policy regime. On the other hand, it has certain advantages too. In Ahmedabad, Gandhinagar and Surat, power generation and distribution is a regulated business, where ROE is pre-defined and efficiencies are not rewarded. Apart from that, distribution is a natural monopoly area and despite being regulated, it is a cash cow for the company. In contrast, the Bhiwandi and Agra markets are major growth drivers. The company has done very good work in containing T&D losses in Bhiwandi, and is reaping rich benefits now. It is trying to replicate the same in Agra, and if its efforts meet with success, it will again be a profitability driver.

Upto 1250 MW of TPL’s capacity is gas-based and it is setting up another 1200 MW capacity at Dahej SEZ, which will take the company’s gas-based capacity to roughly 2450 MW. Hence, the availability of gas as feedstock is going to be a key determinant in shaping its future. Currently, the domestic gas market is out of its depth, mainly due to the regulatory and pricing confusion and the dwindling KG basin supply (pricing is one of the drivers for increasing supply).

LNG is fairly expensive for power generation, and hence cannot be used in isolation but as a certain portion of the overall gas basket. So, TPL's capacity will be underutilised unless the domestic gas supply situation improves. Till then, the company will have to buy power from exchanges or other sources to meet their demand requirements. Even though this is a pass-through cost, it needs to be approved by the regulatory commission before collecting it as fuel charge from customers. Recent developments suggest that in a first of its kind arrangement, TPL will directly buy natural gas from Petronet LNG to feed its station. This will help the company utilise its assets to the utmost.

Another aspect to be looked at is Clean Energy Regulator (CER) generation. Torrent's SUGEN Mega Power plant (1150 MW) is registered to receive Clean Development Mechanism (CDM) benefits. It is estimated that TPL will generate roughly three million Certified Emissions Reductions (CERs) every year if it operates at 80 per cent PLF for a full year. This is another area where gas availability is going to shore up returns.

On the financial front, the company posted a consolidated loss to the tune of Rs 36.68 crore for H1FY13. However, gas availability and the expected turnaround in Agra will be key to the company’s performance. We are of the opinion that the downside is limited from the current levels, but the stock will see significant moves only after at least one of the two issues is addressed. When that happens, its intrinsic value will be significantly higher compared to the current price.