Buy PTC India – 3QFY2011 Result; Target Price of Rs. 135: Angel Broking

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PTC India – 3QFY2011 Result Update

Angel Broking maintains a Buy on PTC India with a Target Price of Rs. 135.

PTC India (PTC) posted an in-line performance on the bottom-line front during

3QFY2011. The company’s net profit for the quarter rose by 139% yoy during the

quarter, aided by strong performance on the operating profit. Operating profit for

the quarter rose by 292.5% yoy to `41cr, on account of higher trading volumes (up

31% yoy) and an increase in trading margins as per the new CERC regulations to

7paise from the earlier 4paise, which have taken full effect. Going ahead, we

expect PTC to witness healthy volume growth due to addition of ~470MW and

~4,000MW to its long-term trading portfolio in FY2011 and FY2012, respectively.

We maintain Buy on the stock.

Operating profit up 292.5% yoy: PTC’s 3QFY2011 net sales grew by 3.6% yoy to

`1,758cr. The improvement in the top line was on account of a 31% improvement

in volumes to 5,813mn units (MU). The yoy increase in volumes was aided by

additional units arising from Lanco Amarkantak (operational since 4QFY2010).

Operating profit stood at `41cr (up 292.5% yoy) due to robust growth in trading

volumes and higher trading margins. Net profit rose by 139.0% yoy to `38cr.

Outlook and valuation: We expect PTC’s top line to witness a 25.9% CAGR over

FY2010–12E. The bottom line is expected to post a 41.9% CAGR over the

mentioned period. At the CMP of `84, PTC is trading at 17.3x FY2011E and 13.2x

FY2012E earnings. We maintain our Buy recommendation on the stock with an

SOTP-based Target Price of `135.

Key highlights

􀂄 PTC’s subsidiary PTC-Financial Services (FS) has recently filed the DRHP

for its proposed IPO. PTC-FS reported net worth of `660cr as of

1HFY2011. PTC-FS currently has total paid-up equity shares of 43.45cr.

The IPO issue size is 15.67cr equity shares, including a fresh issue of

2.92cr shares.

􀂄 As of 3QFY2011, total PPAs signed by the company stand at 13,000MW.

􀂄 PTC’s trading volumes increased by robust 28.3% yoy in 9MFY2011 to

19.3bn units. Growth in trading volumes is expected to be healthy over

FY2011–13 as well due to the addition of ~500MW and ~4,000MW of

projects to the company’s long-term trading portfolio in FY2011E and

FY2012E, respectively. These power projects include 300MW Lanco

Amarkantak Phase-II, 1,200MW Teesta, 550MW Ind Bharat Utkal and

700MW Karcham Wangtoo.

􀂄 Power trading from the tolling projects with Madhucon Projects Ltd. and

Meenakshi Project Ltd. would begin from 2QFY2012 and 3QFY2012,

respectively.

Investment arguments

Power deficit to encourage growth

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

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, the CERC had increased the cap on short-term trading (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 long-term trade (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, 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

Going ahead, we believe PTC's emphasis on the LTT segment will help it in

sustaining higher growth. 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

25.9% 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 41.9% CAGR

over FY2010–12E.

At the CMP of `84, PTC is trading at 17.3x FY2011E and 13.2x FY2012E

earnings. We continue to maintain our Buy view on the stock. We have arrived at

an SOTP-based Target Price `135 for PTC, wherein we have assigned P/E of 10x

FY2012E earnings from the core trading business (`63.9/share), while investments

in PTC-FS, Teesta Urja, Krishna Godawari and Athena Energy Ventures have been

valued at P/BV of 1x FY2012E (`49.4/share). The cash and liquid investments in

the company's books are valued at P/BV of 1x FY2012E (`21.9/share).