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Issue Highlights
Industry Financial services
Total Issue 156,700,000
Fresh Issue 127,500,000
Offer for sale 29,200,000
Issue Size Cr. 407.42-438.76
Price Band (`) 26-28
Offer Date 16-Feb-11
Close Date 18-Feb-11
Face Value 10
Lot Size 250
IPO Grade CARE,ICRA IPO Grade 4
Indicating above
average fundamentals
CRISIL IPO Grade 3
Indicating average
fundamentals
Issue Composition
Net Issue 156,700,000
QIB 78,350,000
NIB 23,505,000
Retail 54,845,000
Business Overview
PTC Financial services is an Indian non-banking financial institution promoted by PTC
India Limited ("PTC") in September 2006 with the objective to make principal
investments in, and provide financing solutions for, companies with projects across the
energy value chain. It is one of the few financial institutions in India that provide both
equity and debt financing, including short-term and long-term debt, as well as structured
debt financing.
With a focus on infrastructure development, it offers an integrated suite of services
including provision of financing to, and make investments in, private sector Indian
companies in the power sector, including for power generation, equipment supply and
fuel source projects. The company is currently focused primarily on power generation
projects in India and also provides fee based syndication and advisory services as well as
carbon credit financing against certified emissions reduction (CER).
PTC holds 77.60% of its equity share capital and GS Strategic Investments Limited (an
affiliate of The Goldman Sachs Group, Inc.) and Macquarie India Holdings Limited (an
affiliate of The Macquarie Group) each hold 11.20% of its equity share capital.
Strengths
Composite financial services platform: The company is a one stop solution provider
offering a comprehensive range of financial products and services that add value
throughout the life cycle of projects across all areas of the energy value chain that enable
it as a preferred financing provider for power projects. As of December 31, 2010, of the
seven principal investments that involve power generation projects, aggregating
3,221.45 MW capacity, one project has commenced operations at full capacity while two
projects have commenced operations for part of their respective capacities,
representing, in the aggregate, approximately 175.6 MW capacity currently under
operation. The investments of the company in greenfield projects represents 79.24% of
total principal investments as of December 31, 2010 and most of these projects are in
advance stages of development.
Strong domain knowledge: The company benefits from the industry experience of its
promoter PTC. Its power sector knowledge and experience helps in identifying
investment opportunities with high potential and effectively manage risks associated
with such opportunities. Its management team has significant experience in the power
sector and the financial services industry that facilitates in identifying specific
requirements of power project developers and offer structured products and services
while effectively managing associated risks and maintaining competitive margins. Its
status as an NBFC and IFC provide greater flexibility than some of the competitors,
particularly banks, and helps to quickly and efficiently capitalize upon financing
opportunities that arise.
Robust balance sheet: The total assets, total income and profit after tax of the company
have grown at a CAGR of 191.54%, 312.86% and 293.86% respectively. As on December 31,
2010 the capital to risk-weighted asset ratio of the company was 60.57% and return on
average total assets in fiscal 2010 was 3.20%. Its long-term bank borrowings have been
rated “LA+” (positive outlook)” by ICRA, while NCDs have been rated “LA+ (positive
outlook)” by ICRA and "BWR AA" (stable outlook) by Brickwork. Its short-term borrowings
have been rated "A1+" by ICRA, which is the highest credit quality rating assigned by ICRA
to short term debt instruments.
In a relatively short period of 11 years its loan portfolio has grown significantly and as on
December 31, 2010, the outstanding loan stands for Rs.595.11 cr to 13 companies with
projects representing 6,794 MW of aggregate power generation capacity. As of December
31, 2010, it had entered into definitive agreements for financing arrangements for an
aggregate amount of 1119.87 cr to 17 companies, with power projects representing
8,283 MW of power generation capacity. As of such date, it did not have any non
performing assets in the outstanding loan portfolio.
Strategy
To expand fee-based services and CER financing: The company intends to grow its
principal investment and debt financing businesses as well as expand fee based and other
services, to ensure effective sourcing and crosssell of its financing products and services.
It aims to increase focus on its current fee-based services that include primarily debt
facility agent and security agent services as well as various advisory services such as
techno-commercial appraisal services. It also intends to increasingly focus on debt
syndication activities in the future to effectively understand the risks and opportunities
in a project and structure financing solutions. It also aims to develop specific expertise in
carbon credits (CERs) segment to effectively capitalize on the growing carbon market
and develop capabilities to offer carbon credit advisory services.
To lower cost of funds: The company aims to lower its cost of funds through the issuance
of infrastructure bonds at comparatively lower yields, as holders of such bonds are
entitled to certain tax benefits. With the view that foreign credit markets offer more
cost-effective terms for long-term debt than the domestic credit market, it has entered
into a financing arrangement with DEG for an external commercial borrowing in an
aggregate amount of 116.51 cr for the financing of renewable energy projects. It has
also have entered into a letter agreement with International Finance Corporation on
January 20, 2011 for a proposed loan of 224.05 cr to support and expand its lending
program to renewable energy projects. It intends to develop and maintain an asset base
with an optimal mix of principal investments and debt financing and also increase the
proportion of long-term debt in its debt financing portfolio so as to further improve credit
ratings for its long-term borrowings resulting in lower cost of funds.
To focus on renewable energy and other emerging segments of the power sector: On
account of significant investment potential in the renewable energy sector in India, the
company continues to evaluate strategic initiatives focused on the renewable energy
value chain. As of December 31, 2010, the company's board had approved aggregate
equity commitment of 82.21 cr for four companies and aggregate debt commitment of
327.33 cr for 12 companies in the renewable energy sector. It has also sanctioned
financing against CERs to two renewable energy companies.
Risks
Volatility in interest rates:
The company's business is significantly dependent on interest income from its lending and
treasury operations. In fiscal 2010 and in the nine months ended December 31, 2010,
interest income represented 51.44% and 70.19%, respectively, of its total income.
Changes in interest rates could affect the interest rates charged on interest-earning
assets and the interest rates paid on interest-bearing liabilities in different ways. Being a
non-deposit taking NBFC, it is exposed to greater interest rate risk compared to banks or
deposit taking NBFCs as a result of its relatively higher cost of funds. Thus, volatility in
interest rates can affects its lending and treasury operations that could cause its net
interest income to decline and adversely affect its return on assets and profitability.
Long gestation period of Power projects: Its business mainly consists of making
principal investments in, and lending to, companies engaged in energy sector projects in
India, particularly to power generation projects. Power sector projects have long
gestation periods before they become operational and carry project-specific as well as
general risks. The development of energy projects in India requires various
environmental clearances that may be difficult to obtain in a timely manner or at all. The
long-term profitability of power project investments, once they are constructed, is
partly dependent on the efficiency of their operation and maintenance of their assets.
Operational disruption, as well as supply disruption could adversely affect the cash flows
available from these projects.
Concentration on few borrowers: As of December 31, 2010, its Board had approved total
debt commitments aggregating 2256.73 crore of which documented, unfunded
outstanding loan sanctions were 524.75 cr and its ten largest debt commitments
approved by the Board represented 54.70% of its total debt commitments.
The single largest debt commitment as of December 31, 2010 was 139.40 cr for
Rukminirama Steel Rollings Private Limited, which also represented the single largest
debt commitment approved by the Board for any single borrower group. This represented
6.18% of the total debt commitments approved by the Board as of December 31, 2010,
and was also the largest unfunded debt commitment approved by the Board as of
December 31, 2010.If any of the loans to these borrowers become non-performing the
quality of its loan portfolio may be adversely affected.
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Valuation
Considering the P/E valuation, the stock is priced at pre issue P/E of 27.15x on the lower
end and 29.23x on the higher end of its annualised FY11 EPS of `0.96. Post issue, at price
`26 and `28, the stock discounts its FY11 annualised earnings per share of `0.74 by 35.11x
and 37.81x respectively. Looking at to P/B ratio, the stock is priced at P/B ratio of 1.83x
and 1.54x on the upper end of its pre issue book value of `15.29 and post issue book value
of `18.17 respectively.
Outlook
The continued power deficit in the country and the government's thrust in the
development of power sector provide huge lending opportunities to the company.
Promoters' expertise and extensive focus on the sector gives the company a competitive
edge. However, short track record with relatively small balance sheet restricts its ability
to fund large size projects. Looking on the valuation part, the offer can be a good bet for
the investors with long term perspective.
