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FY2011 Growth driven by rise in volumes and margin expansion
In FY2011, PTC India (PTC)’s revenues grew by 16% on a year-on-year (Y-o-Y)
basis, primarily driven by a 34% increase in the volumes of electricity traded.
However, the realisation price declined by 5% over the previous year. Power
units traded via the power exchange increased multifold to 3,940 million units
in FY2011 while long term volume also reported a robust 47% yearly growth. In
spite of a fall in other income (due to low profit booking on investment), the
overall net profit jumped by 47% year on year (YoY) owing to an expansion in
the trading margin per unit (trading margin stood at 4.4 paise per unit in FY2011
compared to 3.6 paise per unit in FY2010).
Return ratios improved but still away from double digits
In FY2008, the company raised capital through a qualified institutional placement
(QIP) issue of shares amounting to Rs496.2 crore to be used in several strategic
investments and in maintaining a healthy working capital cycle. This led to a
substantial rise in the equity base and deterioration in return ratios. In FY2011,
the rise in the core profit after tax (PAT; from trading operation) improved the
return ratios; but they are still far below the returns enjoyed during the pre
QIP period. However, in the coming years we are expecting the return ratios to
improve, backed by a rise in trading volume and prevalence of a stable margin
regime.
Rising working capital cycle led by SEBs’ delay
The working capital cycle of the company got further stressed in FY2011
as it increased to 17 days from 8 days in FY2010 owing to a delay in
payments by the State Electricity Board (SEB)s mostly of Tamil Nadu and
Karnataka, which have been incurring operational losses. In FY2011, the
company had recorded Rs977.9 crore as debtors, of which approximately
Rs700 crore worth of payments were due since
December 2010, mostly from the Tamil Nadu SEB.
Excluding these receivables, the debtor days and
the working capital cycle would have been much
lower at 21 days and negative 1.8 days
respectively. The management has now confirmed
that about Rs200 crore has been received as on
date while approximately Rs500 crore is still
pending to be recovered. We sense that high
receivables are blocking the company’s working
capital and lowering the yield on cash. The
company has maintained that the dues from the
Tamil Nadu SEB would be recovered in one to two
months in view of the proposed tariff hike as well
as proposed fund raising plan of an associate
company of the Tamil Nadu SEB.
Update on subsidiaries
PFS
In March 2011, PTC India Financial Services (PFS)
completed its successful IPO and raised around Rs439
crore. PFS has also been granted the status of an
infrastructure finance company (IFC) from the Reserve
Bank of India (RBI) in August 2010. Pursuant with the
IFC status, PFS issued Rs42.1 crore via long term
infrastructure bonds which are eligible for income tax
benefits under section 80CCF.
The company continued with its growth momentum
by doubling its revenues to Rs108.8 crore. Also, the
PAT rose to Rs51.4 crore in FY2011, which is a yearly
increase of over 40%.
The level of disbursement of debt was Rs623.6 crore
during FY2011 compared to Rs282.7 crore in FY2010.
Upfront financing of certified emissions reduction
(CER) amounted to Rs22.2 crore in FY2011 as against
Rs5 crore in FY2010.
PTC Energy Ltd.
PTC Energy Ltd (PEL), a 100% subsidiary of PTC, was
set up to undertake various activities related to the
business of power generation, distribution, import of
coal and other allied works. PEL has imported and sold
2.80 lakh MT of coal as against 1.07 lakh MT in FY2010
and has earned an operating profit of Rs91 per tonne.
In FY2011, PEL has undertaken an investment of 48%
equity amounting to Rs23.4 crore for joint
development of an 80MW wind farm in Tamil Nadu.
Two of PEL’s power tolling projects - Simhapuri Tolling
Project (200MW) and Meenakshi Energy Tolling Project
(150MW) are also expected to commence operations
in FY2012. The cost of production of these projects is
expected to be approximately Rs305 per unit. Here,
the merchant price (since the power produced from
these projects is expected to be sold in the open
market) is expected to be a major determinant of the
future profitability of PEL.
PEL tied up for import of coal to supply 1.76MT per
annum of coal for a period of five years to support
power projects of a total capacity of 450MW. Further
it had also earlier entered into a long term coal sale/
purchase agreement for five years for the supply of
0.7MT per annum (0.3MT for the first year).
Risks highlighted in the annual report
Lagged pace of growth in the industry
Due to increasing concerns over the availability of fuel,
environmental concerns and execution delays the growth
in the power sector has not kept pace with the overall
industry. There has been an acute shortage in the supply
of coal which has driven up costs and slowed down
production for power generation companies.
Deteriorating health of the state power utilities
The SEBs have been booking huge cash losses, which is
resulting in the performance of the sector to suffer. The
industry is shrouded with delays in receipts and payments
which is leading to delays in financial closure and slowing
of the capital expenditure (capex) cycle. This in turn is
constraining growth.
Downgraded estimates
In view of the continuous delays in power projects, SEBs’
poor financials and rising competition in the short term
trading markets (including power exchanges), we have
trimmed our traded volumes assumption by 3 and 11.5%
for FY2012 and FY2013 respectively. Now, we are
estimating a compound annual growth rate (CAGR) of
26.4% in total volumes as against earlier estimates of a
34.4% CAGR growth. We have also lowered our trading
margin per unit to Rs5 owing to adverse changes in the
competitive landscape (low entry barriers are resulting
in new entrants making into the power trading space).
Accordingly our earnings estimate over FY2011-13 has also
fallen from 22% to 17% (CAGR) now.
Valuation remains attractive: Maintain Buy
While the volumes of PTC continued to register stupendous
growth in Q1FY2012, its working capital requirement is
hugely dependent on the healthy payment cycle from its
SEB clients. PTC penalises its clients for delays in
payments by charging 15% per annum on the due and
outstanding receivables. However, this cannot be a long
strategy as most of its clients are repeat customers and
such kind of penalising could result in permanent loss of
business as it happened in the case of Tamil Nadu SEB,
one of its top clients. The power sector is also currently
facing multiple headwinds like fuel linkages, environment
clearances, SEBs’ deteriorating financials, rising cost of
funds etc which have further depressed sentiments in
growth driven stocks including PTC. Hence, we are
downgrading our target multiple to 12x from the earlier
15x on FY2012 standalone earnings estimates. Also, we
are valuing its PEL business at 1x book value.
Overall, our sum of the parts (SOTP) based target price
stands revised to Rs98. However, the current valuation at
less than 1x FY2011 book value remains attractive and
hence we maintain our Buy rating on the stock.
