PTC 􀀗 Strong quarter on the back of volume growth and margin expansion ::HSBC Research

Please Share::  India Equity Research Reports, IPO and Stock News

Visit http://indiaer.blogspot.com/ for complete details �� ��

PTC
􀀗 Strong quarter on the back of volume growth and margin expansion
􀀗 SEB financials to remain an overhang as payment delays continue
􀀗 Trading below book value (0.8x FY13e PB) and offering strong
growth; reiterate Overweight with a target price of INR128


2Q preview – strong quarter as
volumes and margin expand
We expect net profit of INR530m, up 55% y-o-y
driven by:
􀀗 Trading volumes growth of 24% y-o-y in 2Q,
resulting in strong revenue growth of 25% y-o-y
􀀗 Margin improvement to 5.0 paise per unit (up
10% y-o-y), plus rebate and surcharge income
of INR200m (versus INR240m in 1Q), resulting
in EBITDA growing 82% y-o-y to INR590m
􀀗 Other income to decline 8% y-o-y as much of
the cash is deployed as working capital earning
rebate income, which now contributes to
EBITDA.
Outlook is positive but weak financial
health of customers remains an
overhang
We expect volumes to remain strong for PTC,
growing at a 23% CAGR over FY12-14 despite a
high base in FY11, driven by sales through both
long-term contracts (more stable) as well as shortterm
sales. This volume growth, combined with
margin expansion, should drive net profit higher
at a 30% CAGR over FY12-14. We see very
limited downside risk to these estimates.
Furthermore, we believe the risk of default by
State Electricity Boards (SEBs) is limited,
although payment delays may be possible. The
company has indicated that it is going to secure
back-to-back payments from customers.


Investor focus on risk of payment
defaults and deployment of surplus
cash
Investors will be focused on receivable days, rebates
and surcharge income, and risk of defaults by SEBs.
The market will also be watching the volume
sales outlook and looking for clarity on projects
where PTC has made equity investments.
Lastly, the use of surplus cash of INR10-11bn as
working capital is a concern. Hence productive
investments would be viewed positively. We have
already excluded INR6bn used as working capital
from our valuation.
Reiterate Overweight rating with
target price of INR128
We use a sum-of-the-parts (SOTP) method to
value PTC, given the different risk-reward
profiles for different businesses. Based on our
estimates, as shown in Exhibit 24, our target price
is INR128, implying a potential return of 82.9%
(including dividend yield), which is above the
Neutral band for non-volatile Indian stocks of 6-
16%; hence, we reiterate OW on the stock.
Our target price of INR128 implies a FY13e PB
of 1.4x versus the current FY12e PB of 0.84x, and
FY13e PE of 14.1x versus the current FY12e PE
of 11.0x.
We believe the current share price discounts the
risk of defaults by SEBs, which in our view is
unjustified. We expect the stock to re-rate, as the
company should report strong earnings growth
over the coming two to three quarters.
Risks
Downside risks include: delays in projects on which
power purchase agreements (PPAs) have already
been signed, which could affect the outlook for longterm
volume, and the renegotiation of PPAs by
developers, which could affect margins.

see sector view and other company details (click link below):

Indian Power- A muted quarter ::HSBC Research