Stock Review: Power Trading Corporation (PTC)

 

PTC India's stock is expected to outperform with a reasonable certainty and investors may take exposure with a medium-term outlook

 

PTC India has moved to a higher growth trajectory aided by a number of developments over the last three-four quarters. Some of these developments, so far not reflecting in its financials, are expected to provide a boost in the coming quarters. Even though the current P/E of 40 times looks to be on a higher side, investors can consider exposure in the stock with a medium-term outlook.

Business:

Power Trading Corporation (PTC) is in the business of power trading and accounts for nearly half of all the power traded in the country. The company sources power from independent power producers, captive power plants, etc and supplies it to the state distribution boards through both short-term and long-term contracts.

   The company was promoted by four power sector PSUs, which collectively hold 16.3% of its equity. Over 54% of its equity lies with domestic institutional investors and 14.6% with foreign institutions. Being in the trading business, the company operates on thin margins. However, it has quadrupled its profits in the last five years, while tripling its net sales.

Growth Drivers:

Apart from trading, the company has also moved to the fuel intermediation business, whereby the company imports coal from the overseas market to supply the power companies in India. The company is also engaged in power projects financing business through its subsidiary, PTC Financial Services (PFS) with a 77.6% stake. PFS has a net worth of Rs 650 crore and provides funds to power project developers and has so far disbursed funds to the extent of Rs 900 crore, as equity and debt. PFS was recently granted the status of Infrastructure Finance Company (IFC) by RBI, which will make it easier and cheaper for the company to raise funds from domestic as well as overseas markets.

   The company has adopted a more sustainable model of sourcing power through longer term contracts, which contributes nearly 50% to its total power traded currently but would go up to 70% in the next few years. The higher reliance on longerterm agreements reduces the volatility both in terms of volumes and margins.

Financials:

The company recorded sales growth of 16% and volume growth of 35%, for the quarter ended June '10. Its operating margin improved 40 basis points to 1%. With higher volumes and higher margins, the company managed to record more than an 80% increase in its core operating profit over the last year. However, the company was hit by lower interest income, which was down to less than half, and a higher tax outgo, with effective tax rates going up 12 percentage points. As a result, net profit could not maintain the growth rate and actually came down by 16% over last year.

   In the last four consecutive quarters, the company witnessed a fall in net profit despite robust growth in operating profit due to a drastic fall in other income and jump in tax rates. From the September 2010 quarter onwards, this negative impact would vanish and the company's strong operating performance would reflect in the bottomline. Increasing volumes resulted in negative operating cash flow for the company in the last two years, due to high working capital requirements. However, this is typical of a growing business and is most likely to rectify itself this year.

Outlook:

The company's business seems to be gaining traction, aided by more and more power projects getting commissioned. Apart from that, external factors such as improving trading margins and recognition of the financial subsidiary as IFC would also go a long way in propping up PTC's profitability in a power-starved market, which is also looking for innovative solutions to its unique problems. There is also a considerable degree of certainty in the company's business model, which caps the downside. The company's earnings are set to double by FY12 from Rs 94 crore of FY10. The stock is expected to outperform with a reasonable certainty and investors may take exposure with a medium-term outlook.