PTC India - Rating Revision - Non-recurring treasury income propels PAT :: Centrum

Rating: Hold; Target Price: Rs50; CMP: Rs59.8; Downside: 16.3%



Non-recurring treasury income propels PAT



We upgrade PTC to HOLD after recent stock correction post our
non-consensus SELL rating in Dec-13. During the quarter, PTC earned
net surcharge income of Rs0.73bn from UPPCL as part of its final
settlement and reversed provisions of Rs42mn, which cumulatively
propelled PAT. EBITDA was in line but APAT was 5% below estimates. We
are modestly negative on PTC owing to its skewed business model,
likely negative FCF in FY15/16E, core RoE of 7-8% vs. CoE of 14.5% and
current rich valuations.

$ Earnings snapshot: On neutralizing the impact of net rebate of Rs80
mn and earnings from erstwhile tolling projects of Rs133 mn reported
in Q3FY14, core EBITDA was at Rs 214mn. In YTD, net rebate and
surcharge contributed 28% to EBITDA which is seen as negative as it
implies stress in working capital cycle. During the quarter, receipt
of surcharge income of Rs0.73 bn from UPPCL and reversal in provisions
of Rs42mn, cumulatively propelled PAT. These are non-recurring items
and adjusted for these one-off items, APAT was at Rs384mn. We dissect
PAT for YTD period and highlight the share of treasury income at 42%,
net rebate and surcharge at 15%, erstwhile tolling at 11% and balance
32% from core business.

$ Core EBITDA and APAT per unit slide: Core EBITDA/unit at Rs0.027 was
down 15% QoQ as the share of trade on IEX/PXIL was at 28% vs 18% in
Q2FY14. Increasing mix of trade on IEX/PXIL is seen negative as
margins are comparatively less remunerative. It also implies inability
to identify buyer/seller on a bilateral basis and increase in working
capital cycle. Net debtor cycle (net-off UPPCL and overall creditors)
deteriorated sequentially to 25.7 days vs. 17.6 days in Q2FY14. PAT
adjusted with non-recurring items imply earning of Rs0.05/unit which
was down by 18% QoQ.

$ Outlook: We remain modestly negative owing to (1) skewed business
model leading to overall RoE of 7-8% vs. CoE of 14.5%; (2) lack of
visibility on tie-up of PSA for nearly 5.5GW capacity, (though we are
optimistic on it); (3) EBITDA and EBIT CAGR of 6-7% over FY13-16E; (4)
free cash flow peaking in FY14E and sliding down as cash gets
mopped-up in working capital; (5) Uncertainty on contractual disputes
of Rs1.28 bn which is reflected in contingent liabilities; (6)
possible surcharge income from TNSEB that can aid cash flows;  and (7)
current rich valuations.

$ Valuations and key risks: We upgrade to HOLD with a revised PT of Rs
50 (Rs48 earlier) which has been derived from (1) average of value on
fair multiple assigned to EPS and book value on Dec-15E basis; (2)
investments in PFS with a 20% holding company discount; and (3) other
investments at 0.34x BV. Key upside risks are (1) higher trading
volumes and margins; and (2) higher share in profits from long-term
PPAs. Key downside risks are (1) skewed working capital cycle which
may lead to steeper negative FCF; we have built in optimism in working
capital cycle; and (2) lack of buyers for its long term PPAs that
could lead to lower volumes and earnings.



Thanks & Regards

--

��

-->