Stock corner: ‘Add’ on Torrent Power, target price raised to Rs 327

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Updated: July 9, 2019 7:48:57 AM

UNOSUGEN, the brownfield expansion of the SUGEN plant, had signed up 278MW of its 382.5MW capacity with Distribution License (TPL-D) and the tariff on the same had been approved by CERC on a cost plus 15.5% RoE basis.

Torrent Power, Gujarat Electricity Regulatory Commission, GERC, tariff on power, 5MW brownfield gas project, UNOSUGEN, CERC, Torrent Power, TPW revenue, Torrent Power stocks, Torrent Power revenue, Torrent Power shares Assuming this recovery and adjusting higher O&M costs, we upgrade our EPS estimates by 8.9/10.8% for FY20/FY21 and increase our target price to `327/sh from `295.

In an order issued by the Gujarat Electricity Regulatory Commission (GERC), tariff on power from the 382.5MW brownfield gas project, UNOSUGEN, which was determined by CERC in FY14, has been finally adopted, albeit with certain changes. As against a fixed cost of `3,470 crore (`1.68/unit) as in FY19, Torrent Power (TPW) has offered recovery of `230 crore (`1.1/unit) prospectively, hence foregoing fixed cost recovery till date.

Assuming this recovery and adjusting higher O&M costs, we upgrade our EPS estimates by 8.9/10.8% for FY20/FY21 and increase our target price to `327/sh from `295. However, due to the recent run- up in stock price, we downgrade our rating to ‘add’; nevertheless, we remain positive on the company in the long term as it is one of the biggest beneficiaries of distribution reforms.

UNOSUGEN, the brownfield expansion of the SUGEN plant, had signed up 278MW of its 382.5MW capacity with Distribution License (TPL-D) and the tariff on the same had been approved by CERC on a cost plus 15.5% RoE basis.

However, the tariff adoption was pending since FY14 at GERC, which has now been approved. The tariff as above will be applicable for a limited period of 19 years vs 25 years of the PPA. PPA has been approved with the condition that TPW shall enter into FSAs with fuel suppliers by inviting international competitive bids and ensuring that the landed price of power purchase should not exceed the prevailing landed market price for medium term power purchase during a given period.

The rationale for this approval given are: 1) only 69% of peak demand has been tied up in long-term contracts; 2) environmental costs have made alternative conventional fuels as expensive if not more; 3) alternative bids called recently were expensive (`5.47-5.88/unit); and 4) contribution from gas plants is needed for grid stabilisation with increased renewable penetration. We upgrade our EPS estimate for FY20/FY21 by 8.9/10.8% and increase our SoTP- based target price to `327/sh.

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