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.