Renewable Energy Investments Will Improve Operations But Adverse Weather Will Pose Challenges

Key Takeaways

• Strategic growth in renewable energy, green hydrogen projects, and land acquisitions positions Torrent Power for enhanced revenue and operational stability.
  
• Cost efficiency strategies, including forex loss reversal and thermal cost optimization, are anticipated to improve profitability and earnings margins.
  
• Adverse weather patterns, market pressures, and operational expenses threaten Torrent Power's revenue growth and overall profitability.

Catalysts

Engages in the generation, transmission, and distribution of electricity in India.

• Torrent Power's pipeline of 3 gigawatts of renewable energy projects and 2 gigawatts of pumped storage hydro projects positions the company for significant growth in generation capacity, which is likely to enhance future revenue streams.
  
• The company’s pilot project in green hydrogen blending and plans for 18 Ktpa of green hydrogen production aim to capitalize on emerging energy trends, potentially boosting future revenue and diversifying its earnings profile.
  
• The expected commissioning of new projects, including 274 megawatts of renewable capacity and progress on pumped storage facilities, can stabilize operational efficiency and contribute to improved future net margins by leveraging economies of scale.
  
• The company’s strategic land acquisitions and existing connectivity in place for future projects mitigate potential operational risks and facilitate timely project execution, projected to bolster revenue growth and operational stability.
  
• Cost efficiency measures, such as the anticipated reversal of foreign exchange losses, and the optimization of operational costs in thermal generation, could enhance net profitability and support better earnings margins in the coming periods.

Torrent Power Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Torrent Power's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.7% today to 9.2% in 3 years time.
• Analysts expect earnings to reach ₹34.3 billion (and earnings per share of ₹61.72) by about December 2027, up from ₹22.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹26.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.0x on those 2027 earnings, down from 37.5x today. This future PE is greater than the current PE for the IN Electric Utilities industry at 20.8x.
• Analysts expect the number of shares outstanding to grow by 3.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Torrent Power Future Earnings Per Share Growth

Risks

• Lower electricity demand due to extended and widespread monsoon, alongside erratic weather patterns, may negatively impact revenues from power generation.
  
• Declines in merchant power margins due to subdued market prices during certain periods can affect net margins and earnings.
  
• Increased operational and maintenance expenses, coupled with lower incentives from scheduled maintenance, might reduce overall profitability.
  
• Foreign exchange losses, such as the ₹24 crores mentioned, could impact financial results and erode profit margins.
  
• Flat demand growth in distribution areas (1% growth mentioned) signals stagnant revenue growth, impacting earnings potential.

Valuation

• The analysts have a consensus price target of ₹1487.1 for Torrent Power based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2026.0, and the most bearish reporting a price target of just ₹880.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹372.5 billion, earnings will come to ₹34.3 billion, and it would be trading on a PE ratio of 34.0x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹1668.1, the analyst's price target of ₹1487.1 is 12.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.