Why Torrent Power Was Cut To 'Underweight' By Morgan Stanley
The brokerage, however, raised price target to Rs 570 apiece from Rs 510 apiece earlier.
Morgan Stanley downgraded Torrent Power Ltd. to "underweight", noting an unattractive risk reward due to reduced merchant business gains, the prospect of no new distribution licence, and delayed project completion.
The brokerage also lowered the company's FY 2024/25 earnings estimates by 1-2%, citing that its valuations are comparatively higher than before. The stock has outperformed the S&P BSE Sensex by 17% since June 1, possibly due to the expectation of higher merchant gains, according to a note from Morgan Stanley on Aug. 11.
However, the brokerage has raised the price target on the stock to Rs 570 apiece from Rs 510 apiece earlier due to newly contracted commercial and industrial capacity additions in its renewable portfolio.
Unattractive Risk Reward
The company's core business has continued to perform steadily with a strong balance sheet, according to Morgan Stanley. It outperformed the Sensex after the addition of new distribution circles to its supply chain.
Torrent has also gained a new earnings stream as it enters the pump storage business. However, the deal is in the memorandum of understanding stage, with the brokerage expecting inflows from the segment in five years once contracts are finalised.
The brokerage expects lower gains from the merchant vertical going forward. It also sees the possibility of no new distribution license opportunities coming through in the next 12 months and projects slower progress in the pump storage segment.
Q1 Earnings
Torrent's reported revenue rise of 13% was 14% higher than brokerage estimates. This quarter, the company's Ebitda increased by 20%. Decreased Ebitda in the renewable sector as a result of lower wind generation offset higher Ebitda in the thermal sector, according to Morgan Stanley. The firm also attributed the weak distribution business Ebitda to lower demand in Ahmedabad and Agra, as well as bad debt provisions in the franchise business.
The company's adjusted profit after tax missed estimates by 5% on the back of higher interest costs and lower other income, the brokerage said.
Sares of the company fell 1.48% to Rs 630.40 apiece, compared to a 0.58% decline in the Nifty 50 as of 9:50 a.m.
Out of the 11 analysts tracking the stock, four maintain a 'buy', three recommend a 'hold', and four suggest a 'sell', according to Bloomberg data. The consensus price estimate indicates a 2.6% downside over the next 12 months.
