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Torrent Power Equity Research

HomeCompanyTorrent Power Equity Research

Date of Research – 21 January 2016

Price – Rs. 216.60

About the Company

Torrent Power Limited (“Torrent Power” or the “Company”) is one of the leading brands in the Indian power sector, promoted by Torrent Group. And is engaged in the business of power generation, transmission and distribution of electricity with operations in the states of Gujarat, Maharashtra and Uttar Pradesh. The Company’s power plants are located at SUGEN, Taluka Kamrej, District Surat; Sabarmati, Ahmedabad, and Vatva, Ahmedabad.

Currently, the Company has a generation capacity of 2,102 megawatt and distributes 14 billion units to over 2.76 million customers in the cities of Ahmedabad, Gandhinagar and Surat, besides operating as the distribution franchisee in Bhiwandi in Maharashtra and Agra in Uttar Pradesh. Its subsidiaries include Torrent Power Grid Limited, Torrent Pipavav Generation Limited and Torrent Energy Limited.

Torrent Power is currently implementing a 1200 MW gas based power project at Dahej in South Gujarat, through its subsidiary Torrent Energy Limited. The project is called the DGEN Mega Power Project. It is being implemented in a phased manner starting with a 400 MW first phase. It is also in the process of expanding the capacity of its SUGEN plant near Surat.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 8,221.01 8,681.12 10,422.51 11,687.21  10,053.56 
Expenses 6,870.25 7,397.85 8,316.13 8,696.79  7,593.26  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 1,350.76 1,283.27 2,106.38 2,990.42  2,460.30  
Depreciation 427.19 554.37 720.50 877.49  1,005.86
Finance Costs 437.58 704.62 962.29 1,134.56  1,057.98  
Other income 143.52 250.58 339.76 272.03  190.88  
Exceptional items 22.99 7.41  – 
PBT 629.51 274.86 740.36 1,242.99  587.34
Tax 242.59 166.96 377.69 375.78  157.55  
PAT (before Minority Interest and share of Associates) 386.92 107.90 362.67 867.21  429.79  
Profit/ (loss) attributable to Minority Interest 0.22 2.64 2.98 1.61  – 
Share of profit / (loss) of Associates –  – 
Consolidated Profit / (Loss) for the year 386.70 105.26 359.69 865.60  429.79  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 16.43 14.78 20.21 25.59  24.47 
Net Profit Margin Ratio 4.71 1.24 3.48 7.42  4.28 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
Share Capital 472.45 472.45 472.45 472.45 480.62 
Reserves & Surplus 5,288.06 5,630.55 5,732.86 6,083.21 7,054.55 
Net worth (shareholders funds) 5,760.51 6,103.00 6,205.31 6,555.66 7,535.17 
Minority Interest 29.80 31.75 29.60 30.83 31.05 
Long term borrowings 4,875.81 6,016.85 8,744.59 8,255.89 8,243.74 
Current liabilities 2,460.78 3,741.06 2,282.51 2,774.05 1,714.77 
Other long term liabilities and provisions 333.31 806.44 1,151.92 1,158.48 1,104.37 
Deferred Tax Liabilities 464.65 579.32 712.68 857.58 966.51 
Total Liabilities 13,921.86 17,278.42 19,126.61 19,632.49 19,595.61 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
Fixed Assets 11,003.36 13,911.31 14,724.28 15,311.27 15,516.28 
Noncurrent Investments 1.71 1.01 2.34 3.67 5.00 
Current assets 2,272.60 2,856.56 4,107.33 4,146.41 3,340.11 
Long term advances and other noncurrent assets 634.19 499.54 282.66 161.14 724.22 
Goodwill on consolidation (net) 10.00 10.00 10.00 10.00 10.00 
Total assets 13,921.86 17,278.42 19,126.61 19,632.49 19,595.61 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
ROCE 21.65 11.12 8.57 14.19 18.91 
ROE / RONW 21.79 6.34 1.70 5.49 11.51 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 8,221.01 8,681.12 10,422.51 11,687.21  10,053.56 
Growth (%) 3.33 % 5.60 % 20.06 % 12.13 %  (13.98 %) 
PAT (Rs. Cr.) 386.92 107.90 362.67 867.21  429.79  
Growth (%) (69.18 %) (72.11 %) 236.12 % 139.12 % (50.44 %)   
Earnings Per Share – Basic (Rs. ) 8.19 2.23 7.61 18.01  8.93 
Earning Per Share – Diluted (Rs. ) 8.19 2.23 7.61 18.01  8.93 
Price to Earnings 17.06 63.12 20.76 12.78  21.06 

Dividend History

The Company has maintained an average dividend yield of 1.72 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Torrent Power’s average current ratio over the last 5 financial years has been 1.15 times.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Torrent Power’s average long term debt to equity ratio over the last 5 financial years has been 1.01 which indicates that the Company is operating with a high level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Torrent Power’s average interest coverage ratio over the last 5 financial years has been 4.00 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Torrent Power reported a promoter holding of 53.57 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 24.87 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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