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PTC’s 2QFY2011 standalone top line remained flat on a yoy basis at `2,469cr.
However, traded volumes, which are a better indicator of the company’s
performance, rose by 21% yoy to 7.7BU (6.4BU). Growth in trading volumes was
aided by higher generation in hydro plants due to good monsoons and increased
quantity traded under the long-term route. The company also indicated that it had
to lower the margins for the short-term trade (STT) route due to competitive
pressure, despite an increase in the cap on STT to 7paise/unit as against the
4paise/unit charged earlier. We maintain a Neutral view on the stock.
traded volume was under the low-margin cross-border trade route (3BU) and
through energy exchanges (0.8BU), which in turn suppressed the company’s
gross margin (selling price per unit – purchase price per unit). The difference
between the company’s average collection and payment period reduced to five
days from eight days in 2QFY2011, which resulted in the company allowing
more rebates to customers. However, operating profit rose by 28.3% yoy to
`38cr, primarily due to reversal of employee stock option (ESOP) expenses of
`5.7cr. In fact employee expenses turned into negative `3.3cr in 2QFY2011
(v/s `4.9cr in 2QFY2010).
Outlook and valuation: We expect PTC to post top-line growth of 32.6% CAGR over
FY2010–12E. The bottom line is expected to grow by 43.2%. We have arrived at an
SOTP fair value of `137 for PTC. At the CMP of `134, PTC is trading at 27.3x
FY2011E and at 20.5x FY2012E earnings. Owing to the recent run-up in the stock
price, we maintain our Neutral view on the stock.
Conference call highlights
During the quarter, PTC traded 2BU under the bilateral route, while volumes
traded under CBT and from captive power plants stood at 3BU and 0.8BU,
respectively. Volume traded under the long-term trade (LTT) route stood at
1.5BU. The company also traded 0.8BU through energy exchanges.
Management indicated that power trading from the tolling projects with
Madhucon Projects Ltd. and Meenakshi Energy Ltd. would begin from
2QFY2012 and 3QFY2012, respectively.
During 2QFY2011, PTC signed PPAs and MoUs for 12MW and 150MW of
power, respectively. As of 2QFY2011, total PPAs signed by the company stand
at 14,000MW.
As of 2QFY2011, PTC Financial Services (PTC-FS), the company’s subsidiary,
has disbursed `419cr and `615cr under the equity and debt route,
respectively. In addition to the amounts disbursed, the company has
sanctioned `2,100cr under the debt route. Management indicated that it is
working towards carrying out the Initial Public Offer of PTC-FS by the end of
FY2011.
Investment arguments
Power deficit to encourage growth
The total volume of power traded in India is just 8% of the power generated. We
expect the volume of power traded to rise at a healthy rate of 14% due to the
continuing power deficit and increased power generation capacity.
Favourable government policies to aid growth
The National Electricity Policy encourages about 15% of new capacities to be tied
up in the short-term market. Growing emphasis on allowing open access to
consumers to buy power from producers in any state augurs well for power trading
companies.
In January 2010, CERC had increased the cap on STT margin to 7paise/unit from
the earlier 4paise/unit, which is a major boost to profitability, as the 4paise/unit
cap regime was inadequate to cover the operational and market risks borne by
trading companies.
PTC to maintain its market leadership position
PTC is currently the leader in power trading with a market share of 45–50%.
Going ahead, we expect the company to maintain its leadership position in the
power trading market due to its early-mover advantage and increased volume of
power traded under the LTT route, as close to 4,500MW of projects for which the
company has signed PPAs are set to be operational in FY2011 and FY2012.
Transforming into an integrated player in the power sector
Apart from trading power, PTC is also entering other businesses such as financing
fuel intermediation, power tolling agreements and consultancy. PTC-FS, the
company’s financial services arm in which it has a 77.4% stake, has expanded its
business considerably in the past one year.
PTC, through its subsidiaries, is also looking at acquiring coal mines abroad to aid
its fuel intermediation and power tolling business.
Outlook and valuation
We believe PTC's emphasis on the LTT segment will help it in sustaining higher
growth going ahead. During FY2010, STT constituted 50% of the total power
traded by the company. PTC proposes to increase its power trading mix to 70:30
in favour of LTT. The company's increased focus on LTT is expected to provide
consistent cash flows compared to STT, as the number of units generated is
expected to be uniform, resulting in reduced volatility. We expect PTC to register a
32.6% CAGR in its top line over FY2010–12E, following the commissioning of new
power projects. We estimate the company’s bottom line to register a 43.2% CAGR
over FY2010–12E.
We have arrived at an SOTP fair value of `137 for PTC, wherein we have assigned
P/E of 10x FY2012E earnings from the core trading business (`66/share), while
investments in PTC-FS, Teesta Urja, Krishna Godawari and Athena Energy
Ventures have been valued at a P/BV of 1x FY2012E (`49/share). The cash and
liquid investments in the company's books are valued at a P/BV of 1x FY2012E
(`21/share). At the CMP of `134, PTC is trading at 27.3x FY2011E and at 20.5x
FY2012E earnings. Owing to the recent run-up in the stock price, we maintain our
Neutral view on the stock.
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