Torrent Power Reports 46% Decline In Its Net Profit

Ahmadabad based Torrent Power on consolidated basis has posted a decline of 46% to Rs 165 crore in its net profit for the September quarter of the current fiscal. The loss comes despite company achieving 10% rise in its top line to Rs 2209 crore.

Torrent power has a generation, transmission and distribution business in Ahmadabad, Surat and Bhiwandi. This is the second quarter of the current fiscal in which it has reported decline in its earnings. Another Gujarat based power generator Adani Power has also reported loss for the September quarter indicating power sector turnaround may be a dream for the power sector if tariffs are not raised. Under the current scenario the results of these two power companies indicate that there is no change in the fundamentals of the power sector. In fact we are of opinion that the rally in the power stocks that we had seen in the beginning of the year was only sentiment driven and there is no fundamental value to it.

Torrent’s power generation is mainly based on natural gas. After the technical issues in KG-D6 basin the gas production in the country has declined sharply. Owing to this, many gas based power generation plants are facing severe gas shortage. Torrent power has also faced the shortage of gas supply due to which plant load factor (efficiency) of its Sugen Mega Power Plant declined to 49% in September 2012 quarter from 85% in the corresponding quarter last fiscal. As the gas supply was reduced, company purchased power from short term market which resulted in additional expenses impacting its EBITDA margins. During the quarter while all other expenses have remained stable, its expenses related to power purchase on YOY basis rose by whooping 68% to Rs 863 crore. Nearly 50% of total operational expenses were due to the Power Purchases. For the September quarter of last fiscal the same accounted 36%.

In the June quarter of this fiscal company had reported similar gas related problems which had brought down its net profit by 70% on YOY basis. Shares of Torrent Power on the bourses in 2012 have declined by 19% indicating highly bearish sentiment on the stock.

While company has reported decline in tax expenses and depreciation, its finance cost increased by 24%. Thanks to its balance sheet which is showing additional of Rs 1893 crore in its long term borrowing. Total debt is standing at Rs 7417 crore showing debt to equity ratio of Rs 1.22x which is significantly higher to 0.95x seen during the March quarter of FY12.

We expect the power sector to underperform on the bourses in this fiscal due to recurring losses of the companies. We absolutely do not expect any surprise in the power sector result in the September quarter. Adani Power’s result show that imported coal has become an expensive fuel option for power sector while Torrent Power’s results have shown that the gas based power generators will also be in terrible trouble if they cannot pass on the prices to customers.