Geojit Financial Services has upgraded its rating on Torrent Power Ltd. (TPL) to "Accumulate" from "Sell" with a 12-month target price of Rs. 1,893, implying a 10% upside from the current market price. The upgrade is driven by the company's strong Q1FY25 performance, expanding renewable energy portfolio, and significant investments in transmission infrastructure.
Key takeaways from the report:
- Strong Q1FY25 results: Revenue up 23% YoY, PAT surged 87% YoY.
- Expanding transmission footprint: Two projects under development (Khavda and Solapur) with attractive returns.
- Robust renewable pipeline: 3.2GW of projects under development, representing a significant investment over the next 3-4 years.
- Valuation shift: Geojit has moved to a Sum-of-the-Parts (SOTP) valuation method to better reflect the diverse business segments and growth prospects.
- Target price upgrade: Rs. 1,893 based on SOTP valuation, incorporating DCF for new projects and P/Bk for existing businesses.
Geojit highlights Torrent Power's stellar Q1FY25 performance, with revenue growth driven by a substantial increase in thermal generation. Margins expanded significantly, leading to an 87% YoY jump in Profit After Tax (PAT). The company's strategic focus on transmission infrastructure is evident with the development of two key projects, the Khavda and Solapur transmission projects, which are expected to generate attractive returns.
Furthermore, Torrent Power is aggressively expanding its renewable energy portfolio with 3.2GW of projects under development. These projects, coupled with the transmission projects, will see the company invest close to Rs. 20,000 crore in the coming years. This commitment to renewable energy aligns with the broader industry trend and positions Torrent Power for long-term growth.
The analyst has shifted the valuation methodology from Price-to-Book (P/Bk) to SOTP to capture the value of the individual business segments and growth projects more accurately. Renewables, thermal, and distribution businesses are valued using Enterprise Value to EBITDA (EV/EBITDA) multiples. New transmission and pumped storage projects are valued using Discounted Cash Flow (DCF), while the green hydrogen project is valued at 2X P/Bk. This comprehensive approach leads to a target price of Rs. 1,893, prompting the upgrade to "Accumulate."
However, potential risks to the company's outlook include delays in project execution, regulatory changes impacting the power sector, and fluctuations in fuel prices affecting the profitability of thermal generation.
Looking ahead, Geojit anticipates Torrent Power's earnings per share (EPS) and book value per share (BVPS) to grow at a compounded annual growth rate (CAGR) of 36% and 15%, respectively, between FY24 and FY26. The company's strong financial performance, strategic investments in transmission and renewables, and a favorable industry outlook support the positive outlook.
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