PTC India ::Emkay: Top Sells

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TP : Rs65
Investment Rationale
§ Short term volumes (70% of current volumes) witnessing huge competition - unlikely to grow over next 3-4 yrs
§ Current margins of 5-6paise is likely to come down to 3-4paise (few traders already charging low margins)
§ Long term trading is a very risky business - PTC takes market price risk (guarantees CERC returns to developers
under any scenario) and credit risk (SEB default) in its books.
§ But, in case of a scenario where PTC is able to sell at higher than CERC prices, only 5-10% of the upside is kept
by PTC. Thus, its taking a call on the market price but not keeping the returns from the upside
§ To earn ~17% ROE in best case scenario in its trading business - assuming the liquid funds it has to keep in its
balance sheet to transact volumes (for transacting the estimated volumes by FY13E, PTC will need about
Rs10bn liquid funds, which is the current cash in hand).
§ In the tolling business, the cost of generation is likely to be upwards of Rs3.5/unit. We strongly believe that at this
level of cost, PTC is likely to make losses
Valuations
§ Thus, looking at its SoTP - (1) trading business which will earn in the best case scenario, just about cost of
equity, and in other scenarios, it might make losses, has to be valued at significantly less than 1x book, (2)
Tolling business – at best zero value if not negative, (3) Cash is actually working capital and at max it can be
valued at 0.33x (5% yield / 15% cost of equity) and lastly (4) its equity investments in power projects cannot be
valued at more than 1x book when PTC financial services itself is trading at 1x book. Thus, considering that all
the components of SoTP has to be valued at less than 1x book, PTC is trading at near 1x book. Sell

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Emkay: Top Buys and Sells