Torrent Power - Financial Analysis and Future growth prospects

There are many counters across the board that have corrected sharply and are now looking attractive. But there some among them that actually have the ability to bounce back on the strength of their fundamentals and growth prospects. Torrent Power is among few such counters, which we feel can give investors better returns in the long term.

There are two main factors that makes Torrent Power a must-have at this juncture. First, it is the huge capacity expansion plan that would put it right in the big league in the coming years. Second, with the sharp correction of 59 per cent, which this counter has witnessed, valuations have become attractive. And, it makes sense to grab it now for better returns.

This Gujarat-based company is into power generation, transmission and distribution. With a current capacity of 500 MW (400 MW at Sabarmati and 100 MW at Vatva), it generates revenues by supplying to Ahmedabad, Gandhi Nagar and Surat with a customer base of around 20.87 lakh. Besides, the company also earns revenues from the distribution business in Bhiwandi, Maharashtra.

In FY08, the sales increased to 9,418.41 million units (7,199.72 million units) with an average revenue realization per unit at Rs 3.81 compared to Rs 3.79 in the previous year.

The triggers come from the fact that the management laid out an aggressive growth plan, wherein it wants to add power generation capacity of more than 8,647 MW from its existing capacity of 500 MW. While the delayed 1147.5 MW Sugen gas-based power project is expected to be commissioned this fiscal, the other plans are still in embryonic  stages. These include 3,000 MW Sugen II and Sugen III project, 1,500 MW Dahej project, 2,000-plus MW Pipavav project and 1,000-plus MW Morga Chattisgarh project. For Sugen II and Sugen III, the company has already started the process of land acquisition, which is besides its Sugen project. For the Dahej plant, with the feasibility study done, it has already invited bids for EPC contract, while a subsidiary –  Torrent Pipavav Generation – has been incorporated for developing the Pipavav Project. Another positive is its preparedness for earning carbon credits.

But there are some concerns as well. In the last fiscal, the company faced gas availability problems at its Vatva plant. It could only get 78 per cent of its requirements. Besides, gas prices have gone up, which will impact it in the current fiscal.

In Q1FY09, revenues of Torrent Power increased 24 per cent to Rs 1,113.35 crore (Rs 897.87 crore), while the bottomline increased 49.59 per cent to Rs 53.84 crore (Rs 35.99 crore) during the same period. On the valuation front, its EV/MW comes to around Rs 4.85 crore, which we feel is in line with the industry standard.

Investors can therefore buy the company’s shares at a CMP of Rs 120 and retain them for a longer term to secure maximum returns.