Torrent Power (TPW) has provided a detailed update of the impact of the ongoing lockdown due to COVID-19 on its various businesses. P/L impact remains limited to incentives on regulated business (as core RoE remains intact), while the extent of impact on distribution franchises (DF) will depend on the duration of the lockdown and certainty in volume pick-up as well as collections post the opening of the lockdown. Renewables, which are “must run”, will post higher profits due to increase in capacity. TPW expects its net debt to decline further by Rs7bn by FY21-end and 75bps decline in the cost of debt. However, it expects an increase in working capital by Rs10bn for the next few months till demand recovers. We have factored in a volume decline of 8% for DFs in FY21E (and for FY22 due to base effect), reducing our EPS estimates by 20.7%/13.1% for FY21E/FY22E. Downgrading TPW to ADD with a revised target price of Rs328 (earlier: Rs348).
· Regulated businesses only marginally impacted; core RoE intact: With 1,178MW of gas-based power under long-term PPAs (increase of 278MW in Q3FY20 due to PPA at UNOSUGEN), the company expects only a marginal impact on EBITDA due to lower SHR incentive income (expected to be offset by lower O&M cost). The same is also true for coal-based AMGEN plant, which has assured fixed cost + RoE, even though it is currently under reserve shutdown. In case of renewable business, the 788MW operational capacities (62% internally tied up, balance with third parties) have a “must run” status. Licence distribution will be impacted only due to lower incentive income as T&D losses are estimated to be higher than the current normative of 5.7%. Merchant volumes are expected to remain flat YoY, but margins will reduce, thereby, lowering profits.
· Extent of lockdown impact on DF business is currently uncertain: ~50% of total sales at Bhiwandi + Agra are from commercial/industrial segment where TPW expects 50% decline in volumes in Q1FY21. But with a demand increase of 3-4% p.a. in the past five years, TPW believes, volumes for FY21 will eventually match FY20. Still, uncertainty on demand recovery as well as collections, particularly from stressed consumers, remains, and the extent of impact will depend on the lockdown duration. We have conservatively estimated 8% decline in volumes for FY21E.
· Debt reduction trajectory intact; interest cost to decline substantially: TPW expects to reduce its debt by Rs7bn by FY21-end (FY20-end debt is Rs92bn). Average cost of debt will also reduce from 9.2% to 8.45% resulting in substantial reduction in interest cost. With moratorium in place and collection impacted due to lockdown, TPW expects to borrow up to Rs10bn at 7.5% to address its temporary working capital mismatch (additional interest cost impact of up to Rs200mn).
· Valuation: We reduce our EPS estimates for FY21E/FY22E by 20.7%/13.1%, respectively, factoring in lower incentive income, lower volumes as well as uncertainty on DF profits, and downgrade our rating to ADD on the stock with a revised target price of Rs328 (earlier: Rs348), valuing the company on SoTP basis.
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