Torrent Power Limited (TORNTPOWER) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Investor Analyst Conference Call hosted by Torrent Power Limited to update on the acquisition of Nabha Power Limited announced today. [Operator Instructions] On the call, we have the management team of the company represented by Mr. Jigish Mehta, Whole-Time Director, Generation; and Mr. Saurabh Mashruwala, Executive Director and CFO. I now hand the conference over to Mr. Saurabh Mashruwala, CFO. Thank you, and over to you, sir.

Good evening, everyone, and thank you for joining the call. As communicated earlier today, we have entered into a definitive agreement with L&T to acquired 100% of equity stakes and convertible instrument in Nabha Power projects. Nabha Power operate 1.4 gigawatts supercritical coal-based power plant located at Rajpura, Punjab. The enterprise value net of cash for the transaction is approximately INR 6,889 crores, comprising of 3 components. First, INR 3,661 crores of equity and convertible instruments, INR 495 crores for repayment of the promoter loan and INR 2,733 crores of net debt. The transaction is based on lockbox date of 31st March '25 with customary closing adjustment at the time of consummation. It is expected to be consummated by Q1 of FY '27, subject to necessary regulatory approvals. For FY '25, the company reported an adjusted EBITDA of INR 1,153 crores adjusted for the lease accounting, implying an EV/EBITDA multiple of 5.97x and as per megawatt cost of INR 4.92 crores. Now let me give you a brief on some basic parameters of the acquisitions. First, company operated 1,400 megawatt coal-based power plant, which is fully tied up to 25 years PPA under Case II Competitive Bidding Guidelines and has been operated -- operational for more than 12 years with balance life of 13 years. PPA allows for further extension based on the mutual discussions. Second, EPS two-part tariff mechanism comprising of, first, fixed capacity charges payable based on the plant availability, respective of the demand scheduling. And second, variable charges linked to actual landed cost, coal cost and normative operating parameters. Third, over the last 3 years, plant has demonstrated strong operational performance with availability consistently above 90%, auxiliary consumption maintained at or below 4.6% and special heat rate maintained well below the CRC recommended level of 2,359 QC KL KVH. Acquisitions add high-quality best-in-class and established operating assets in our portfolio, supported by fully contracted cash flows and strong operating track records. It is expected to be EPS accretive from the day 1. Acquisitions allow us to extend our footprint without introduction of execution complexity and accelerating our growth in the thermal sector. With this addition, our operating capacity increased from 5 gigawatt to 6.4 gigawatts and is in line with our philosophy of having stable cash flows, accretive equity returns with minimum risk. We expect the asset to deliver more than mid-teen IRRs with certain upsides not considered such as there are 4, 5 upsides, which have not been considered. First, transfield expanded by 800 megawatts for which certain infrastructure is already available and land is also available for the expansion unit. Second, higher O&M expenses has been considered compared to the historical average. Third, higher SSR degradation considered compared to the historical average. Fourth, lower realization from the client systems. The fifth is higher interest rate assumed compared to our current average cost of borrowing of Torrent Power. This concludes my remarks. I request the coordinator to open the line for the Q&A session. Thank you so much.

[Operator Instructions] Our first question comes from the line of Sumit Kishore from Axis Capital.

Sir, my compliments on this acquisition. My first question is, could you speak about the residual PPA life for the project and your assessment of the residual useful life of the project as well as what you intend to do after the signed PPA term gets over? That's my first question.

So Sumit, thank you so much. So PPA life is 25 years, which is a fully contracted basis with the Punjab State DISCOM. Out of this 25 years, 12 years is already over and 13 years is yet to go. And as you know, the plant is manufactured by the Japanese technology and built by the Mitsubishi -- L&T. It's very good plant. Technically very sound plant, very good plant. And we expect beyond PPA, at least it will run more than 10 to 15 years, I would say.

Okay. So maybe 12, 13 years -- 12 years of residual -- 13 years of residual PPA period plus another 10, 15 years of useful life.

10, 15 years, it can easily run because of the good technology, super critical plant, it's a good machinery also.

So while this is still quite some time away, post the 13-year residual PPA period, should we assume that on mutual agreement, you will continue to operate that plant with Punjab being the offtaker on the similar tariff? Or would you have some other plant.

No, tariff needs to be negotiated by the end of the PPA, but we expect the tariff will be competitive, I would say. And if you look at the MoD basically, merit order dispatch, this plant rank high on the ranking basically. And as Punjab is seeing the growth rate of 5% to 6%. So we expect the demand of the energy will continue in Punjab. And based on the current rankings on high on merit order dispatch, we expect that we can be able to get expansion also from the Punjab discount.

Makes sense. Just one accounting question. In terms of the adjusted revenue of INR 4,866 crores that you have reported in your presentation versus the Nabha Power reported revenue of somewhere around INR 4,400-plus crores. So if you can help us bridge the difference as to what restatements have you made to arrive at?

About INR 450 crores restatement is required because of the lower revenue -- because of the lease accounting, lower revenue is accounted basically as compared with the actual cash flows. If you look at the cash flow statement of Nabha Power as on March '25, so you can see the operating cash flow of INR 1,500 crores against the reported EBITDA, I would say, is about INR 750 crores. So besides working capital adjustment, I would say the INR 450 crores is incremental cash flows we expect from this power project as compared to the reported numbers.

Okay. So what was the operating cash flow in FY '24, '25 for Nabha Power?

So cash flow report was about INR 1,500 crores operating cash flows. In '25, INR 1,500 crores and '24, it was around INR 1,350 crores. Operating cash flow will be better than the reported numbers, reported P&L numbers.

So just want to understand the EBITDA number that you've given for FY '25 is INR 1,153 crores and operating cash flow is INR 1,500 crores. So are there some -- was there accumulated working capital that got released because of which operating cash flow was higher than EBITDA?

Yes. Yes. Yes, that could be the reason, yes.

Okay. Okay. So what is the accumulated working capital in Nabha right now in terms of number of days of revenue or whichever way you want to sort of...

Net current asset is about INR 700 crores.

INR 700 crores on a revenue base of INR 4,866 crores.

INR 4,600 crores, I would say.

I think what are the expansion opportunities that you sort of hinted at and what kind of capital commitments you would look to make to that expansion, if at all, over the next few years?

One more unit is possible. The land is available, surrounding infrastructure is also available. So one more unit is possible. But we have to take over the plant and then we have to see how we can -- be able to expand the one more unit. But one more unit expansion is possible at this particular site.

Just last question, your thoughts on what your consolidated leverage level looks like on a pro forma basis after you absorb this acquisition and basis the CapEx that you have over the next couple of years, how does the revenue?

We will add about INR 7,000 crores -- INR 6,000 crores debt to our current balance sheet. At the same time, L&T Nabha network is also available, which is about INR 5,000 crores, I would say.

So Sumit, on a net debt-to-EBITDA basis, it comes at around INR 6,000 crores divided by INR 1,100 crores is the net debt number.

Net debt to...

5.5. It's 5, 5.5 at the start. And if I look at my overall projections going forward, I think we are comfortable in terms of net debt-to-EBITDA numbers are concerned for next 5 to 6 years because all those investments which we are making in thermal, renewable and pump storage, they will be over a period of time. The good part is that it is also coming with a significant EBITDA right from day 1.

Yes. it will be ROE accretive from day 1 because it's a highly levered. So it will be ROE accretive as well. Is that right?

Yes.

[Operator Instructions] Our next question comes from the line of Atul Tiwari from JPMorgan.

Congratulations on the acquisition. Sir, my first question is, in FY '25, what was the fixed charge in the tariff? And what was the actual fuel cost? Because I believe, obviously, coal has to be hauled over long distances there.

So fixed charge -- capacity charge, I would say, would be about INR 1,400 crores. INR 1,400 crores. Per unit, it is about INR 1.49.

Capacity charge.

Capacity charges. And the variable cost will be about INR 3.28 kind of things.

Okay. And the variable cost, there was no under recovery based on that number, right? You were able to recover the actual fuel cost on a landed basis.

Yes, it is completely pass. So it is fully recoverable.

Okay. And sir, this INR 1.49 capacity charge in FY '25, what does this number become in FY '30 and '35 in the -- as per the PPA?

It will be about INR 1.41 kind of thing. It's not materially different, I would say.

Okay. So not much decline. So the decline is very less, okay. So that's good to know.

[Operator Instructions] Our next question comes from the line of Anuj Upadhyay from Investec.

So there was an agreement between the Punjab Government and Nabha Power to set up certain green energy project as well, which I believe falls under the same SPV, which we have taken over. So will we be continuing with the green capacity addition or it would continue to be under the L&T part? Just want a clarification on this thing.

So as of now, no such agreement, I would say.

Okay. So nothing on the brownfield side on the green energy side.

So Saurabh, just to add to this, I think it was more of a statement between the -- I mean, by the Punjab administration rather than any such agreement. So there is no such agreement.

The next question comes from the line of Aniket Mittal from SBI Mutual Fund.

I joined the call a bit late, so apologies if any questions are repeated. Just to understand on the adjusted EBITDA part, when I look at the P&L, the EBITDA number over there is a bit low. But I do see certain amount that is flowing into the cash flow, which seems to be some sort of capital cost recovery. If you could just help bridge that gap for me? I mean, why is the number in the P&L lower? What is exactly flowing into the cash flow that doesn't seem to be flowing into the P&L?

The main difference is the lease accounting, which we have adopted since the beginning of the start of the plan. And because of the lease accounting, we have to amortize the capacity charges over a period of lease over a 35-year PPA period. And because of the accounting thing, we are able to record about INR 450 crores of lower revenue as compared with the actual cash flows. So there is the difference. So adjusted EBITDA and as well as cash flow will be higher than the reported numbers by INR 450 crores.

Okay. So on an average, if I look at FY '25, there seems to be some one-off because of certain fixed deposits that have been reduced. But roughly INR 1,100 crores is like a fair cash flow from operations that this plant should throw. Is that a fair understanding?

Yes, yes.

Yes. And how does that number sort of progress, let's say, over a period of time, let's say, if I look at FY '30, FY '35, given the capacity charge, I guess, will move downwards. What's the steady state.

Yes. As I explained earlier, the current capacity charge is INR 1.49. Going forward, it will be around the level of INR 1.42, INR 1.43. So maybe reduction of about INR 0.05, INR 0.06 and energy cost will be fully recovered. There won't be any material impact as compared to what currently we are reporting.

Got it. And are there any maintenance CapEx-related costs that you envisage for the plant? What would be the annual?

Not material. Not material.

The other thing that I noticed in the P&L that there's no tax being paid. It seems that there are certain tax benefits that one can still avail. Could you provide some light on that? What's the tax holiday period that can look like over here?

They may have MAT credits available with the -- MAT credit available. So that MAT credit is -- they are under MAT right now. So their MAT credit will be available for the use going forward.

Okay. Until what time could this be available?

So our expectation is that they are able to use MAT credit by next 3 years, I would say, 3 years.

Next 3 years. Fair. I had one more question to understand. So when I look at the EV that has been -- of the transaction that has been reported, the net debt number that has been reported is of March '25 end. I just wanted to understand what would be the current net debt number over there? And like is the transaction based on the EV value or the -- or irrespective of the net debt, it's the equity amount of INR 4,100 crores that you'll pay equity value. Just a clarification.

It's the equity value.

Sure. And what would be the current net debt over there? Would you be able to?

Net debt will be lower. March number was -- net debt was INR [ 2,733 ] crores. It is lower than the current number -- March '25 because there's some repayment has happened in the course of 9 months.

Right. Okay. And just another aspect, you mentioned that this transaction would be funded through debt. What's the average borrowing cost that one should assume?

Average borrowing cost -- current borrowing cost about 8.5%. And Torrent Power average borrowing is about 8%. So that is what we attempt to manage the Torrent Power borrowing cost going forward.

[Operator Instructions] Our next question comes from the line of Bharanidhar from Avendus Spark.

Am I audible?

Yes, yes.

Okay. So to clarify, the EV of INR 6,900 crores that is at the end of FY '25 would be paid from totally debt -- from our direct new debt. Is that the right understanding?

So Bharani, if you look at it, we are supposed to pay INR 3,660 crores as equity value and around INR 500 crores would be infused in the SPV for repayment of promoter loan from there. So total net outflow from Torrent would be around INR 4,000 crores, INR 4,100 crores. Balance is the debt, net debt which is there at the SPV.

Which will add to the debt that we will have.

That's right.

Yes, that's -- what I meant was INR 4,100 crores incremental debt we will take plus whatever debt is coming from them will get added. So INR 6,900 crores of debt will be added to our consolidated numbers from FY '27.

Yes, yes.

Second question is this EBITDA, there are 3 numbers. One, the P&L EBITDA of around INR 750 crores and then the adjusted number you're telling is INR 1,153 crores. And then the OCF of INR 1,500 crores. So what will actually be our accounting policy? Will it include the lease accounting? If not, how much actually would be the expected EBITDA accretion that will happen?

No, no. See, as per the reported basis is INR 755 crores because traditionally, we are from the lease accounting. So that number of FY '25 will remain there. In terms of cash flows, because there is a contracted cash flows super tariff available, cash flows will be higher by INR 450 crores because of the principal repayment is going to come basically. So cash flow will be higher by INR 450 crores.

Okay. So in other words...

Operating cash flow is per working capital adjustment also, but in terms of EBITDA, it will be INR 1.50 crores.

So this operating cash flow adjustment due to working capital, will it continue for the next -- how many years?

In terms of working capital adjustment, actual working capital adjustment.

No, no. So Bharani, I think what we are discussing here is that the reported number is based on lease accounting, which is lower by INR 450 crores, if we had to follow the normal accounting practice. Now if you want to tally that INR 450 crores, if you look at the cash flow of FY '25, there is a line item which says that INR 458 crores because of lease impact accounting. And if you look at the cash flow from operations, from that cash flow, it is INR 1,500 crores. So Saurabh bhai was referring to that number.

Understood. So to rephrase again, when we are consolidating, there will be INR 750 crores odd at our end also at the P&L level, but actually, the EBITDA is around INR 1,150 crores.

That's right. Cash flow will be much higher than the reported numbers.

That I understand. Correct. Next question is the fact that some time back, there was a dispute between the client and L&T. This was regarding coal transportation charges, import of coal charges, et cetera. Have all those been closed? And would we get all types of variable cost pass-through from our side going forward?

[ Rishal bhai ], Can you respond?

So basically, the thing is that while we had done this transaction, we have mainly, I mean, taken care of it that all the ongoing issues which were there are closed or if the ones that are not closed, they are appropriately taken care of or ring-fenced. So as such, no major issues are there. Some certain regulatory issues are there, which have been appropriately accounted while we were doing our assumptions.

Okay. So to rephrase all the actual fuel costs, including cost of coal from BCCL and transportation costs, all that will be passed on.

So there must be -- but I mean, a few issue here. We may have to look into that if they are there. But however, the regulatory issues appropriately have been factored.

So could you highlight what are these some few issues?

We can do it separately because some of these maybe -- as of now, we have done it broadly on a major level only.

Sure. No problem. My final question is on the improvement in IRRs we highlighted in the opening remarks, like, of course, you were talking about expanding by one more unit of 700 megawatts in the future. And there were 2, 3 other points, which I missed. One was related to higher interest rate of L&T, but when we take it up, it will be lower. That I understood. I think 2 more points were mentioned. Can you repeat that?

I can repeat. So basically, we have a budget of considered higher O&M expenses as compared to the actual O&M expenses happened last 2, 3 years. So that cushion we have built in our projection -- as projection. SHR degradation we have budgeted, which historically this plant doesn't show any degradation in the SHR, that also we have budgeted in our projections, in our estimation. And we have assumed a lower fly ash income, which is possible to -- going forward, we can able to get higher fly ash income also. That also we have budgeted -- we have budgeted lower fly ash income. So those are -- these are the upside, which we have not considered in our projections, which can -- which may come in going forward.

So to rephrase because we are conservative, we are assuming more SHR degradation and higher O&M expense, but in reality, we will be spending lesser, so that will result in more cash.

Yes.

And the last thing I didn't clearly understand, lower what income, sir, lower fly ash income? What did you mean?

Lower fly ash income, fly ash income.

Okay. You're considering lower fly ash income, but it could actually be higher.

Yes, it could be higher, yes.

[Operator Instructions] As there are no further questions from the participants -- I'm sorry, we have a last minute registration coming from the line of Mr. Anuj Upadhyay from Investec.

I guess just a clarification to the previous participant. The entire INR 6,009 crores of funding would be through debt. Is this what you mentioned, sir?

So yes, it's a mix of debt and equity, but yes, higher amount of debt.

Okay. And in terms of the project valuation or forecasting, 30% should be equity funded is what we should consider?

So Anuj, I think it will all depend on when the consummation happens and actually what is the cash flow requirement. But I think major part of it would be from debt funded. So here, 70-30 rule may not apply.

Our next question comes from the line of Satyadeep Jain from AMBIT Capital.

Just one question on the fly ash income. You're saying there is potential for increase there versus what Nabha was doing. These are typically long-term contracts for fly ash to -- you mentioned UltraTech and Ambuja Cement there. So how do you -- just trying to understand how do you plan to increase? And maybe is it possible to quantify what are you charging for fly ash right now, what Nabha is charging?

So Satyadeep, quantification would not be possible. What we are trying to say is that there are certain contractual agreements, which provides for a higher recovery. But on a conservative side, we have taken some lower recoveries out of that. And that's why we are saying that on a conservative basis, there could be a higher revenue from fly ash disposal. We will not be able to share exact numbers on the contractual basis.

What exactly -- I'm not able to understand. The contract allows for higher pricing, but Nabha was charging, how is that optionality? Because these are typically longer-term contracts.

I'll tell you. I'll explain. So basically, the contract allows for certain escalations on a year-on-year basis or on a 5-year basis. On our projections and in our model, we have considered lower escalation compared to what the contract provides for.

Okay. So there is some potential just based on escalation.

Yes.

My -- if I understand correctly, it's going to be fly ash income, given typically the contract price of fly ash is not that material in the overall earnings, but I can take it offline this way.

Yes, yes. Thank you.

As there are no further questions from the participants, I now hand the conference over to Mr. Saurabh Mashruwala for closing comments.

Thank you, everybody, for joining this Nabha Power Call. Thank you so much.

Thank you. On behalf of Torrent Power Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

Thank you.