Torrent Power’s Q3FY13 Net Profits Decline 55%, EBITDA Significantly Lower

Gas-based power generation in the country has been under pressure for some time, and the issue has now started taking a toll on well established companies. Torrent Power is one such firm that is bearing the brunt. The company, which derives most of its power through the gas-based generation units, has posted a 55% decline in its net profit, which stands at Rs 96 crore for the quarter ended Dec 31, 2012. Its topline remained muted at Rs 1877 crore.

Until last year, Torrent Power has been a very safe utility, with its profits rising moderately every year. However, it has seen its profit declining 58% in the first nine months of the current fiscal due to the issues related with gas-based generation. The topline during this period was up by 8%, but the EBITDA margins have dropped from 30% to 18% on a YoY basis.

Much of the company’s problems are associated with the purchase of electricity to meet demand. This high cost electricity has seen a jump of nearly 44% on a YoY basis to Rs 575 crore. As a percentage of sales, this component was 31% in the Dec 2011 quarter while it has jumped to 44% for the Dec 2012 quarter. For the June and Sept quarter of the current fiscal, purchase of electricity has remained at levels over 40%. Fuel cost, which is the largest component for power companies, has clearly gone down from 32% to 27% over four quarters on account of limited availability of gas.

A more worrying sign is that the power purchase is increasing on a sequential basis while fuel cost has been decreasing on a sequential basis. This clearly indicates that the company may see its profits go down further as it purchases open access electricity which will turn expensive during summer.

During the quarter, Torrent Power has also seen its interest expenses rising by 50% to Rs 119 crore. Though the taxes seem to have remained lower on a YoY basis, the effective tax rate during the quarter remained at 35% compared to 29% a year earlier.

Gas based generation may see further lows as the problems in gas supply from the KG-D6 basin are not expected to be resolved until 2015-16. Recently, GAIL has commissioned an RLNG terminal from Dabhol, but the gas from the terminal is primarily for the South-based companies where the gas-based power plants are facing even greater problems.

Other companies that also run such power plants are Lanco, GVK, GMR, Tata Power, NTPC etc. While NTPC and Tata Power have lower gas-based generation mix, Lanco, GVK and GMR have plants primarily based on gas due to proximity to the KG-D6 basin. Torrent’s results seem to have set the tone for the results of the other utilities too, and indicate that the gas-based power utilities in India are highly vulnerable. We advise investors to avoid Torrent Power as the situation may worsen in the Mar 2013 quarter.