And in that context, we like NTPC, Power Grid and essentially NHPC which are scaling up capacities to meet this rising power demand in India. On that backdrop, we also like Torrent Power. We are hoping that some reforms will kind of play out and these companies will actually benefit from these reforms. So we are quite positive on the sector per se.
What makes you that bullish on the counter? Is it that new parallel distribution license that they are bidding for?Over the years that is one company which has grown the earnings through combination of renewables as well as distribution and that is what the incremental capital allocation strategy tends to be. We are quite upbeat on both of these segments, distribution because as the power demand grows and the reforms kick in private players will actively play a role in shaping up the sector and Torrent is one of the few players who have got the DNA to scale up the distribution business. So that is number one. Number two, even while scaling up the renewable portfolio they have exhibited that they are not reckless in terms of bidding and they are selectively taking over assets or selectively growing the portfolio with returns being the critical factor to monitor. And then if you have a strong balance sheet, prudence in terms of capital allocation you cannot remain ignorant to such kind of growth story. Moreover, the earnings growth will be in high single digits or low double digits and the valuations are quite undemanding on FY24-25.
Now the government is forcing these companies to import more coal if needed but what happens to the cost for all of this, is this going to be a complete pass through is that mechanism in place or will the companies face working capital issues?It is a very valid critical question. So while power demand has grown and partly the states have been able to pay for the power thus far partly because of their collection efficiencies perhaps going up and perhaps also because of the incremental working capital. I am being mindful of one fact that there are seven state elections lined up in this particular financial year and typically states have not shown strong political will during the election times to increase the power tariffs. What can derail the whole story is basically if the demand keeps on growing recklessly and states do not undertake required power tariff hikes then perhaps we will have to revisit the whole bullish argument.
I am hoping on the fact that commodities eventually will correct, the coal prices will moderate and even though the demand will keep on increasing the lower cost pressures will ensure that even on the existing tariffs states continue to service their PPA obligations. But yes, if the commodities remain at an elevated level then we will have to revisit the whole hypothesis.