HSBC Research: buy PTC – trade growth, investment unlocking

PTC – trade growth, investment unlocking
 Strong and stable growth phase with c42% earnings CAGR
expected over next three years
 Assured long term PPA and PSA make business model robust
compared to historical trends
 Subsidiaries and associate investment to deliver significant value
creation in FY11 and FY12. Upgrade to OW(V) from N(V); raise
TP to INR161 from INR122


Investment summary
Significant potential for re-rating
We believe that the company has entered a high
growth phase for its core business which we
expect to continue for a few more years. We also
expect there to be significant opportunity for
value enhancement over the next two years from
the group’s investments in subsidiaries and
associates companies. And although the net cash
position of PTC is a bit of a concern, we upgrade
the stock to Overweight (V). Our view is driven
largely by the following factors.
Entering a stable high growth phase
We believe PTC remains well placed to benefit
from strong and stable growth in the power trade
business in the medium term. In our opinion, the
visibility around future growth has significantly
improved lately, as the company has successfully
achieved both backward and forward linkages,
through PPAs (c16,000MW), PSAs (c5,500 MW)
and several short-term power contracts from its
traditional segments. The company has also won
several Case I bids for both long- and mediumterm
power supply to various distribution utilities
(recent wins include c1.5 GW of long term and
c1.0 GW of medium-term power sale to the state
of Karnataka). Consequently, we expect the
power trade business to witness a CAGR of c32%
over the next three years, leading to a trading
income growth of c27%. In addition to growth in
volumes, the trading income growth should also
find support from (i) c75% higher margins on
power sold at more than INR3/kwh, and (ii) an
increase in the proportion of long-term power
contracts (which typically have higher returns) to
over 60% of sales.
Assured supply of c4.2GW to support growth
over the next 3 years
The company has also made significant progress in
addressing its supply side bottlenecks by expanding
beyond its core Bhutan projects.