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Earnings beat estimates, backed by 44% volume growth
PTC India (PTC) reported adjusted PAT of INR 241 mn (up 51% Y-o-Y, driven by
5.8 bn kWh volumes traded and sustained margins at 4.5 paise/kWh, despite low
average selling rate of INR 2.99/kWh versus INR 3.85/kWh in Q3FY10. With
improvement seen in merchant trades and approaching elections in Tamil Nadu,
we believe PTC will maintain trading volume growth in FY12.
Extraordinaries of rebate and surcharge raise reported PAT
PTC reported higher earnings due to rebate reversal and surcharge income from
delayed payment by Tamil Nadu SEBs. The SEB delayed payment by a month,
resulting in it paying penal charges of INR 200 mn to PTC. The company also
incurred higher interest charges of INR 5 mn to fund the working capital.
Employee costs no longer have adjustments for ESOP write off and, hence, were
lower than expected.
Higher PSAs and L1 status in multiple case I bids provide security
PTC currently has signed PSAs of 5 GW (versus 3.5 GW last quarter). Moreover,
the company has received LoI from Karnataka for 1.3 GW of power, which is
expected to be converted into a PSA shortly. Over and above these, PTC has also
emerged as the L1 bidder for 1.7 GW, which are expected to be converted into
PSAs in the next six months. We expect PTC to have long-term PPA based
capacities of 9-10 GW by FY14 (excluding cross border contracts with Bhutan).
Against this, the contracted PSAs, LoIs and L1 bids, put together (excluding
cross border), amount to ~10 GW, which secures long-term cash flows for PTC.
Outlook and valuations: Volume estimates upgraded; maintain ‘BUY’
We have revised our volume estimates to 23 bn units (21.5 bn units earlier) for
FY11 and 27 bn units for FY12, while continuing with average margin
expectations of INR 5 paise /kWh. We have raised FY11 EPS estimates by 7%
and by 23% for FY12. Our FY12 estimates do not include the 1 GW Karcham -
Wangtoo project of JP Power Ventures (currently under arbitration), where a
settlement is probable. We have also factored in the 360 MW tolling projects in
FY13 though they are scheduled to commission in H2FY12. We reiterate
‘BUY/Sector Outperformer’ on the stock, with revised SOTP target of INR
136/share (from INR 144/share earlier, due to 100 bps upward revision in Ke,
which now stands at 14%).
Key takeaways from Q3FY11 earnings conference call
PPA and PSA status; margins of 2.0-2.5% on long-term contracts
Cumulative PPAs (power purchase agreements) signed is stable at 14 GW, while back-toback
PSA (power sale agreements) signed have improved to 5.4 GW. Moreover, PTC has
received LoI from Karnataka for 1.3 GW of power, while it has also emerged as the L1
bidder for 1.4 GW in Andhra Pradesh and 300 MW in Uttar Pradesh. These are all
expected to be converted into PSAs in the next six months. All PSAs signed extend the
liability of non-performance on the generator (since they are back-to-back), thus,
limiting PTC’s risk exposure. The cumulative PSAs, Case I bids and LoIs stand at ~10GW
which is in line with the PPA capacity commissioning by FY14. The company structures its
case I bids in a manner so as to earn 2.0-2.5% margins on its bid price. Thus, on
average INR 3.5/kWh bids, PTC will earn 7–9 paise/kWh for its long-term
projects. We continue to assume average 5 paise /kWh margins for FY12E and
FY13E.
Receivable days stable at five days
PTC’s receivable cycle was 9.5 days for FY10, which has come down to average 5 days in
9mFY11. The cycle shot up to 18 days in December 2010, primarily due to Tamil Nadu
SEB’s delayed payment by a month, which resulted in rebate reversal. However, on
receipt of the payment in January 2011, receivable days are back to 5 days. PTC’s
management reiterates that it received 90% payment by the due date.
Coal supply contract for tolling water-tight; incremental coal trading by PEL
PTC’s coal supply agreement for its tolling projects is for 1.4 mn tonnes for its share of 350
MW contracted with Madhucon and Meenakshi projects. The contract, according to the
management, is water-tight with a cap on pricing at USD 60/tonne FOB with an existing mine
owner. The company, through its 100% subsidiary, PTC Energy (PEL), has undertaken coal
trading from Q3FY11 through the same supplier. PEL plans to trade 0.3 mn tonnes in FY11
and then it scale up to 0.7 mn tonnes FY12 onwards, earning ~USD 1-2/tonne.
Strong volume growth expected in FY12 and FY13
The management expects the Madhucon tolling project (PTC’s share 200 MW) to
commission by July and Meenakshi (PTC’s share 160 MW) by December, 2011. Over and
above these, the management also indicates that long-term PPA based projects and
possible settlement of the Karcham dispute would add 6 bn units in FY12. The addition in
FY13 is expected to be 25 bn units, against PTC’s FY11E volume of 23 bn units. We
have factored in the tolling projects only in FY13 and have not factored the
Karcham project for our estimates.
Outlook and valuations: Volume estimates upgraded; maintain ‘BUY’
We have revised upwards our volumes assumption to 23.5 bn units for FY11 and to 27 bn
units for FY12, accordingly increasing earnings by 7% and 23% for the respective years.
We have revised our valuations due to upward revision in our Ke assumptions by 1%,
which now stands at 14%, based on higher risk free rate of 8%. Accordingly, the revised
SOTP stands at INR 136/share. We reiterate ‘BUY/Sector Outperformer’ on the stock.
Company Description
PTC was established in 1999 to develop a competitive market for electricity trading and
also to take on the credit risk, thus facilitating private investment in power development.
Although started as a standalone with virtual monopoly in the market up to FY04, the
company started losing market share from 70% in FY05 to 44% in FY07, before
recovering ground in FY08. PTC currently enjoys ~40% market share. As the market
dynamics improved and volumes grew, the need for standalone trading entities also
started to decline. This is because most power producers started floating their own
trading arms, leading to increased competition and lesser tradable surplus available to
PTC. The company realised this risk early on and, hence, began diversifying into being
an integrated entity with entry into coal trading and power project development and
financing. This ensured that it gained access to 13 GW of power capacity through long
term PPA’s, with equity stakes in multiple projects.
Investment Theme
PTC India’s (PTC) current 18 bn kWh power trading volume in FY10 is expected to
catapult 150% by FY13E and triple by FY15E to 57 bn kWh. This growth is expected
solely from long-term PPA-based trades, where margins are higher. This ensures PAT of
INR 2.7 bn in FY13E (233% growth over FY10).
The company has diversified into power generation, tolling, project financing, and coal
trading for captive power capacities, which will garner further volumes. Its project
financing arm (PFS) has facilitated the tying up of 12 GW of PPA capacities, providing
maximum impetus to earnings by FY12-13. The power tolling arrangement for 360 MW is
a lucrative option for earning margins as high as 60-80paise /kWh, adding INR 1-1.5 bn
to annual earnings by FY13E.
Key Risks
PPA defaults: PTC has faced its share of troubles with LANCO, Torrent Power, and
recently JP Power Ventures (erstwhile JP Hydro for the Karcham Wangtoo project). These
parties have all dishonored their respective PPAs with the company on various legal
counts. However, most of these issues are now sub judice, with the Supreme Court
encouraging an amicable solution through arbitration in most cases.
Imported coal risks: CERC had capped trading margins at 4 paise/kWh in early 2006,
reducing traders’ earnings potential substantially. However, in its recent notification, the
regulator has raised the cap on short-term margins to 7 paise, with no cap on long-term
margins. While CERC’s current stance appears to be pro free-markets, its reversal in
future could risk earnings.
Exposure to SEB’s weak finances: One of PTC’s main activities is to cover credit risk
for its customers. Hence PTC is exposed to weak finances of various SEB’s it sells power
to. Though SEB’s finances are in an appalling state PTC has not faced any payment
issues with a working capital cycle of 5 days. Moreover in the event of a default it is
likely to occur more for large payments outstanding to banks and utilities than to traders
like PTC who’s payout forms a small portion of SEB pay outs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Earnings beat estimates, backed by 44% volume growth
PTC India (PTC) reported adjusted PAT of INR 241 mn (up 51% Y-o-Y, driven by
5.8 bn kWh volumes traded and sustained margins at 4.5 paise/kWh, despite low
average selling rate of INR 2.99/kWh versus INR 3.85/kWh in Q3FY10. With
improvement seen in merchant trades and approaching elections in Tamil Nadu,
we believe PTC will maintain trading volume growth in FY12.
Extraordinaries of rebate and surcharge raise reported PAT
PTC reported higher earnings due to rebate reversal and surcharge income from
delayed payment by Tamil Nadu SEBs. The SEB delayed payment by a month,
resulting in it paying penal charges of INR 200 mn to PTC. The company also
incurred higher interest charges of INR 5 mn to fund the working capital.
Employee costs no longer have adjustments for ESOP write off and, hence, were
lower than expected.
Higher PSAs and L1 status in multiple case I bids provide security
PTC currently has signed PSAs of 5 GW (versus 3.5 GW last quarter). Moreover,
the company has received LoI from Karnataka for 1.3 GW of power, which is
expected to be converted into a PSA shortly. Over and above these, PTC has also
emerged as the L1 bidder for 1.7 GW, which are expected to be converted into
PSAs in the next six months. We expect PTC to have long-term PPA based
capacities of 9-10 GW by FY14 (excluding cross border contracts with Bhutan).
Against this, the contracted PSAs, LoIs and L1 bids, put together (excluding
cross border), amount to ~10 GW, which secures long-term cash flows for PTC.
Outlook and valuations: Volume estimates upgraded; maintain ‘BUY’
We have revised our volume estimates to 23 bn units (21.5 bn units earlier) for
FY11 and 27 bn units for FY12, while continuing with average margin
expectations of INR 5 paise /kWh. We have raised FY11 EPS estimates by 7%
and by 23% for FY12. Our FY12 estimates do not include the 1 GW Karcham -
Wangtoo project of JP Power Ventures (currently under arbitration), where a
settlement is probable. We have also factored in the 360 MW tolling projects in
FY13 though they are scheduled to commission in H2FY12. We reiterate
‘BUY/Sector Outperformer’ on the stock, with revised SOTP target of INR
136/share (from INR 144/share earlier, due to 100 bps upward revision in Ke,
which now stands at 14%).
Key takeaways from Q3FY11 earnings conference call
PPA and PSA status; margins of 2.0-2.5% on long-term contracts
Cumulative PPAs (power purchase agreements) signed is stable at 14 GW, while back-toback
PSA (power sale agreements) signed have improved to 5.4 GW. Moreover, PTC has
received LoI from Karnataka for 1.3 GW of power, while it has also emerged as the L1
bidder for 1.4 GW in Andhra Pradesh and 300 MW in Uttar Pradesh. These are all
expected to be converted into PSAs in the next six months. All PSAs signed extend the
liability of non-performance on the generator (since they are back-to-back), thus,
limiting PTC’s risk exposure. The cumulative PSAs, Case I bids and LoIs stand at ~10GW
which is in line with the PPA capacity commissioning by FY14. The company structures its
case I bids in a manner so as to earn 2.0-2.5% margins on its bid price. Thus, on
average INR 3.5/kWh bids, PTC will earn 7–9 paise/kWh for its long-term
projects. We continue to assume average 5 paise /kWh margins for FY12E and
FY13E.
Receivable days stable at five days
PTC’s receivable cycle was 9.5 days for FY10, which has come down to average 5 days in
9mFY11. The cycle shot up to 18 days in December 2010, primarily due to Tamil Nadu
SEB’s delayed payment by a month, which resulted in rebate reversal. However, on
receipt of the payment in January 2011, receivable days are back to 5 days. PTC’s
management reiterates that it received 90% payment by the due date.
Coal supply contract for tolling water-tight; incremental coal trading by PEL
PTC’s coal supply agreement for its tolling projects is for 1.4 mn tonnes for its share of 350
MW contracted with Madhucon and Meenakshi projects. The contract, according to the
management, is water-tight with a cap on pricing at USD 60/tonne FOB with an existing mine
owner. The company, through its 100% subsidiary, PTC Energy (PEL), has undertaken coal
trading from Q3FY11 through the same supplier. PEL plans to trade 0.3 mn tonnes in FY11
and then it scale up to 0.7 mn tonnes FY12 onwards, earning ~USD 1-2/tonne.
Strong volume growth expected in FY12 and FY13
The management expects the Madhucon tolling project (PTC’s share 200 MW) to
commission by July and Meenakshi (PTC’s share 160 MW) by December, 2011. Over and
above these, the management also indicates that long-term PPA based projects and
possible settlement of the Karcham dispute would add 6 bn units in FY12. The addition in
FY13 is expected to be 25 bn units, against PTC’s FY11E volume of 23 bn units. We
have factored in the tolling projects only in FY13 and have not factored the
Karcham project for our estimates.
Outlook and valuations: Volume estimates upgraded; maintain ‘BUY’
We have revised upwards our volumes assumption to 23.5 bn units for FY11 and to 27 bn
units for FY12, accordingly increasing earnings by 7% and 23% for the respective years.
We have revised our valuations due to upward revision in our Ke assumptions by 1%,
which now stands at 14%, based on higher risk free rate of 8%. Accordingly, the revised
SOTP stands at INR 136/share. We reiterate ‘BUY/Sector Outperformer’ on the stock.
Company Description
PTC was established in 1999 to develop a competitive market for electricity trading and
also to take on the credit risk, thus facilitating private investment in power development.
Although started as a standalone with virtual monopoly in the market up to FY04, the
company started losing market share from 70% in FY05 to 44% in FY07, before
recovering ground in FY08. PTC currently enjoys ~40% market share. As the market
dynamics improved and volumes grew, the need for standalone trading entities also
started to decline. This is because most power producers started floating their own
trading arms, leading to increased competition and lesser tradable surplus available to
PTC. The company realised this risk early on and, hence, began diversifying into being
an integrated entity with entry into coal trading and power project development and
financing. This ensured that it gained access to 13 GW of power capacity through long
term PPA’s, with equity stakes in multiple projects.
Investment Theme
PTC India’s (PTC) current 18 bn kWh power trading volume in FY10 is expected to
catapult 150% by FY13E and triple by FY15E to 57 bn kWh. This growth is expected
solely from long-term PPA-based trades, where margins are higher. This ensures PAT of
INR 2.7 bn in FY13E (233% growth over FY10).
The company has diversified into power generation, tolling, project financing, and coal
trading for captive power capacities, which will garner further volumes. Its project
financing arm (PFS) has facilitated the tying up of 12 GW of PPA capacities, providing
maximum impetus to earnings by FY12-13. The power tolling arrangement for 360 MW is
a lucrative option for earning margins as high as 60-80paise /kWh, adding INR 1-1.5 bn
to annual earnings by FY13E.
Key Risks
PPA defaults: PTC has faced its share of troubles with LANCO, Torrent Power, and
recently JP Power Ventures (erstwhile JP Hydro for the Karcham Wangtoo project). These
parties have all dishonored their respective PPAs with the company on various legal
counts. However, most of these issues are now sub judice, with the Supreme Court
encouraging an amicable solution through arbitration in most cases.
Imported coal risks: CERC had capped trading margins at 4 paise/kWh in early 2006,
reducing traders’ earnings potential substantially. However, in its recent notification, the
regulator has raised the cap on short-term margins to 7 paise, with no cap on long-term
margins. While CERC’s current stance appears to be pro free-markets, its reversal in
future could risk earnings.
Exposure to SEB’s weak finances: One of PTC’s main activities is to cover credit risk
for its customers. Hence PTC is exposed to weak finances of various SEB’s it sells power
to. Though SEB’s finances are in an appalling state PTC has not faced any payment
issues with a working capital cycle of 5 days. Moreover in the event of a default it is
likely to occur more for large payments outstanding to banks and utilities than to traders
like PTC who’s payout forms a small portion of SEB pay outs.
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