Torrent Power


(Krishna) #1

Hi Friends

Just going through the Power Stocks… Torrent Power seems the best bet. Why is it so under-valued? Any special reasons?

-Krishna.


(Anand Bhushan) #2

Problem with torrent power for the time being is structural…as for the time being this is buying power for distribution and not generating 100% power themselves.

I guess it takes atleast 2-3 quarters so far as production issues are concern.


(GreyFool) #3

No gas for their upcoming plants( all majorly dependent on RIL’s KG basin production). They are buying fuel(LNG ?) from spot mkt and Gujarat SEB’s have not given pass-thru of entire increase in fuel costs(as reflected in last 2 qtr results). If RIL gas production recovers then Torrent Power can be a multibagger I guess from current levels.


(Ayush Mittal) #4

Yeah, this group has been a wealth-creator and the co did really well in past. I remember this was one of the first co (formerly when it was Surat Electric) when my Dad explained me the importance of balance sheet in 2002-03. He used to highlight the customer advances/deposits the co used to hold. They also had lowest T&D losses in those years. It became a real multi-bagger from there.

Lets try to read more on this co and understand if the problems are temporary.

Ayush


(Dhwanil Desai) #5

I have no qualms in saying that torrent power is today the best company in power sectoron almost all the metrics whether it is operational efficiency, conservative promoters, strong balance sheet or cash flow generation.I am saying thisas a customer of torrent power (as Iam residing inAhmedabad) andbeing a professional involved in power sector. Whether you take T & D losses or 40 years old units operating atphenomenal 90% + PLF. It is one the bestrun power companies operationally.

Howerver, does it make a great investment? In my view it is operating ina business that isin quagmire for last2-3 years ranging from fuel supply (coal), gas allocation, regulatory confusion and lack ofclear policy regime.Power generation and distribution in Ahmedabad, Gandhinagar and Surat is a regulated business where ROE is pre-defined and efficiencies are not rewarded. Even though distribution is a natural monopoly, it is not a great business because it is being regulated. Having said that, it is a cash cow. In contrast Bhiwandi/Agra are the profit/growth drivers. In Bhiwandi, Torrent has done some very good work and company is reaping benefit now. In Agra, they are trying to replicate the same and If succeesful, it will again be a growth/profitability driver.

Torrent has installed capacity of roughly 1800 MW where 1250 MW is gas based. They are setting up another 1200 MW at Dahej SEZ taking their gas based capacity to roughly 2500 MW. Hence availability of gas is going to bea key determinant in shaping up Torrent’s future. Currentlydomesticgas market is in tatters mainly due to number of regulatory/pricing confusion and dwindling KG basin supply( pricing is one of the drivers for increasing supply). LNG is fairly expensive for power generation and hence can not be used on stand alone basis but as certain proportion of overall gas basket. So if domestic gas supply situation improves (which is unlikely till 2014), torrent’s capacity is going to be under utilized. Hence, they will have to buy power from exchanges/other sources to meet with their demand commitments. Even though, this cost is pass through,it is to be approved from regulatory commission before collecting it as fule charge from customers.

Another aspect to be looked at is CER generation. Torrent’s sugen power (1150 MW) is registered to receive CDM benefits. It is estimated that torrent will generate roughly 3 million CER every year if it operates at 80% PLF for full year. HOwever, CER generation is based on actually power generated from 1150 Mw and not on isntalled capacity. Hence, if Sugen capacity is under utilized, CER generation will be less. This is another area where gas availability is going to shore up returns.

In nut shell, currently the factor leading to undervaluation is uncertainty. gas availability andturnaround in Agraare going to be key to Torrent’sperformance. In my view, downside is limited from current level but stock will make significant moves only after either of the two issues will get addressed. However when that happens, intrinsic value will be significantly higher compared to current price.

Best Regards

Dhwanil Desai


(Excel Monkey) #6

Hi Dhwanil,

To what extent are they allowed to pass the increased cost to customers?

What would be the tariff levels if they buy the gas from spot market at $ 15 as compared to around $ 5 that they pay for KG D6?

If the tariff hike is not much and if the regulator approves means they are not dependent on the gas shortage.

Regards,

Excel


(Vivek Gautam) #7

Any updates on their Agra experience.Heard that no industrial users were given to them n residential users used to free power are creating lot of problem for Torrent in Agra. Also what’s happening to their Kanpur license for which also the deal was signed?


(Excel Monkey) #8

Their agra experience. http://www.deccanherald.com/content/285365/punchups-mar-power-privatisation.html


(Aditya) #9

Torrent Power will get cheaper gas now thanks to the Qatar gas decision of lowering prices. Despite the lower prices, where are they placed in the pecking order of power prices? Will the new prices be competitive enough?

Disclosure: Invested in Torrent Power


(Hitesh Patel) #10

aditya,

I had invested in torrent power some time back when govt had allocated gas to run gas based power plants up to a PLF of around 30-35%. At that time the story was looking like a low downside opportunistic bet bcos i expected torrent power to report consolidated net profits of 2.5 to 3 times in fy 16 as compared to fy 15. Based on half yearly results co looks set to report eps of around 20 per share for fy 16 compared to 7.6 in fy 15. And with gas availability assured for next 20 years due to arrangement with ras gas, the uncertainty about running the gas plants has reduced considerably.

Even fertiliser companies would be assured of lower tariff gas supply and hence the outlook assumes more certainty for them.

I was expecting some re rating in both torrent power and fertiliser pack shares.

But these are not long term buy and forget kind of companies. One has to watch the story unfold and keep riding till the trend remains intact.


(Dhwanil Desai) #11

Hi Aditya,

My understanding is that recent price revision decision is for Petronet’s existing long term Rasgas supply of 7.5 MMTPA. All of 7.5 MMTPA gas has already been allocated to customers many years back and they may stand to benefit from them. However, from what I understand, Torrent does not have any allocation out of this 7.5 MMTPA and hence is not likely to be direct beneficiary of this.

However, as Hiteshbhai mentioned, they did get gas allocation (based on spot LNG to be brought by GAIL) and hence will be running their gas based power plants at 30%+ capacity for FY 16. Most of this capacity was idle and hence even fixed cost recovery was difficult. Now with these plants running at 30% capacity partial fixed cost recovery will be possible thus improving the numbers on consol basis for them. More importantly, they will be replacing the power purchased from other sources (exchanges/bilateral agreements) with captive power which is likely to be cheaper at certain gas price (Around USD 7/MMBTU)

Cost of power generation: it is a function of number of variables i.e. power plant efficiency (heat rate), gas price, USD-INR conversion and PLF at which the plant runs. For the efficiency of TPL’s gas based plants, the rule of thumb will provide variable cost of Rs.3.2-3.5/Kwh for USD 7-8/MMBTU gas price and current USD-INR rate. In addition, the fixed cost will be around Rs. 1.1-1.25/Kwh. thus total cost of power generation will be around Rs. 4.4-4.75/Kwh.


(Aditya) #12

Thanks Dhwanil and Hitesh. That was extremely informative. Fully understood the reason why Torrent would benefit. Mainly higher PLF and cheaper gas compared to current supply sources.

As you said, you cannot buy and forget in this case. From what I understood, gas prices will now be decided on a three month rolling basis. So the benefit can reverse if gas prices were to rise suddenly. Will try to find something on gas prices outlook and post.


(Aditya) #13

“The revised price will be based on a three-month average price of oil, replacing a five-year average” as per:

Key factors to consider while estimating oil price outlook:

  1. Saudi Arabia and Russia producing at highest levels since early 1990s
  2. Lower Chinese demand likely
  3. Increased Iranian exports in 2016 to further pressurise prices
  4. Gap between crude supply and demand has been growing since mid-2014, although showed some convergence in late 2015
  5. Brent crude prices are expected to remain below USD50 per barrel till 2018 as per Moody’s estimates
  6. For natural gas, North American storage levels are at record peaks
  7. Rapidly increasing supply will continue to weigh on Natural Gas Liquids prices, hence expected to stay below $15/bbl till 2018
  8. A large number of reserves begin to provide economic returns for many producers at $3.00/MMBTU, putting a cap on natural gas prices

Overall, it is likely that Torrent will continue to purchase gas at current rates with a 20% rise till 2018.


(Ayush Mittal) #14

Are there are good research reports available on Torrent Power?

Its interesting to see that the company has been able to improve its performance substantially with the availability of gas from the Govt to let the plants operate at about 25-35% PLF. It seems the current performance may continue for an year post which things can improve if they are able to tie up for more gas or LNG.

There are lots of questions around the strategy behind such major expansion without adequate tie-up of fuel and PPA.

Lets try to understand more on these things.

Regards,
Ayush


(zulfiqar) #15

business seems to be an interesting point .will the return ratios improve


(Ankit Gupta) #16

Hi Ayush. At least on fuel side, I can say that many of the companies including Torrent had put up gas based power plants banking on cheap gas available at USD 4.20 per MMBTU from KG basin of Reliance Industries. The initial estimates of the reserves were 80 mmscmd which later turned out to be one tenth of it.


(Aditya) #17

Hi Ayush,

Have you seen these two reports on gas availability for power plants?

https://www.edelweiss.in/research/Power-Imported-Gas-Auction-Receives-Favourable-Response;-Event-Update/29018.html

https://www.edelweiss.in/research/Power-Gas-Based-Plants-Get-A-Lease-Of-Life;-Sector-Update/28670.html

Regards
Aditya


(Manish) #18

Can anyone share update on Sugen plant. It has installed capacity of 1150 MW; how much is the current plant load factor. Details on PPA pricing & gas price paid by the company. Basically need update about Sugen Plant.

Regards

Manish Shah


(zulfiqar) #19

is torrent power getting rerated ? can any broaders can give any insights into it


(Hitesh Patel) #20

the above link provides following info. (copy pasted from the link)

The stock of Torrent Power saw some correction in its price on Thursday after consecutive days of rally talking its price up by 27 per cent since the New Year. News flow such as Petronet LNG renegotiating its gas prices with RasGas of Qatar and shareholders of the company giving a go ahead for an increase in debt has led to the spurt in stock prices. Three of Torrent Power’s gas-based plants - SUGEN, UNOSUGEN and DGEN located in Gujarat are currently operating at sub-optimal levels. SUGEN which has long-term off-take agreement with Ras Gas is likely to benefit the most from Petronet’s negotiation. Petronet has revised its long-term purchase price from RasGas by $5.5 per million thermal units or mmbtu (from $12.5 mmbtu per to $7 mmbtu) and limiting cost escalation to $1.34 mmbtu for every $10 increase per barrel of crude oil. Devam Modi of Equirus Securities says that RasGas price revision will lead to economically feasible variable cost. “SUGEN will see an immediate rise in plant load factor (PLF) to 75 per cent, while UNOSUGEN and DGEN will ramp up gradually to 40-50 per cent PLF.” He expects the blended gas-based PLF to increase from 30-35 per cent estimated in FY16 to 50-70 per cent over the next three years and return on equity to expand from 12 per cent estimated for FY16 to 18-20 per cent by FY18- FY19.

Currently, much of Torrent Power’s fuel for gas-based units is procured from government’s auction scheme for re-gasified liquified natural gas, where minimum PLF of power plants is mandated at 25 per cent. From a low base, higher PLF helped it to expand its revenues by 17 per cent while profit more than trebled to Rs 466 crore in H2 FY16 y-o-y. According to Ambit Capital, further improvement could be expected post the second round of auction in 2015 (held in May) as UNOSUGEN and DGEN are likely to operate at 50 per cent PLF between October 2015 and March 2016 (compared to 35 per cent earlier) and SUGEN may maintain its PLF at 35 per cent. Next round of auctions in March 2016 could improve Torrent Power’s position further. That said, the recent run up in stock price has resulted in its FY17 price to earnings ratio (10.85 times) appear expensive against peers such as Reliance Power (10 times) and JSW Energy (8.8 times).