Stock Review: PTC India

Late Monday's news of the Reserve Bank of India granting PTC Financial Services (PFS) the status of an infrastructure finance company (IFC), on the lines of larger entities such as IDFC and Power Finance Corporation, will boost growth. Since PFS is a 77.2 per cent subsidiary of PTC India and accounts for about afifth of the latter's valuation, expect a positive rub-off on the latter. Notably, the prospects of PTC itself are looking good on the back of improving volumes and margins, which should drive its consolidated performance over the next two years.

More resources, better profits

After the IFC status, PFS would be in a better position to raise finance through cheaper sources such as tax-free bonds and external commercial borrowings (allowed up to half its net worth through the automatic route). Also, banks are more willing to lend to such entities as their risk weights come down. Analysts at Angel Broking expect that the cost of borrowing for PFS will fall by about 50 basis points after this event. On lending, too, IFCs can lend more to a single borrower or a group, which will now be applicable to PFS. In short, its whole business will get a boost and financials will improve: It reported net sales of `49 crore and a net profit of  `25.5 crore for 2009-10. PFS is currently involved in providing debt and equity support to the power sector. The company plans to leverage its net worth of `600 crore three times and have a loan book of `2,000 crore in about a year.

It has so far sanctioned debt and equity assistance of about `3,000 crore to more than 40 projects worth 8,000 Mw. PFS is in a fund-raising phase and also in talks with some private equity agencies. Thus, this news will help the company attract better valuations.

Core biz prospects improving

In the June quarter, PTC India's core business, power trading, put up a subdued show, with growth in income 16 per cent lower year-on-year due to poor realisations and net profit declining 17 per cent to `27.8 crore on account of a 49 per cent fall in other income, led by a dip in cash yields. However, volume growth continued to remain strong at 37 per cent to 5,747 million units, and average margin remained higher at `5.62 per unit (up seven per cent sequentially and nine per cent year-on-year).

The coming quarters are expected to be good for the company, with improvement in volumes and margins due to wider power deficit, upcoming commercialisation of capacities and renewal of older contracts at a margin of seven paise per unit on short-term trades compared to the four paise earlier (allowed from January. In the longer term, the bigger share of high-margin long-term contracts under power purchase agreements (PPAs) from around 40 per cent of the portfolio to 70 per cent will provide stability to revenue flow and better profitability. The company has signed cumulative PPAs of about 15,756 Mw, of which about 4,500 Mw is slated to commence operations in the current and the next financial years.

Investment rationale

Improving volumes, better profitability and an improved regulatory environment augur well for PTC, which is a leader in the domestic power trading segment, with a market share of 45-50 per cent. The company's plan to come out with an initial public offer of PFS, which forms about 22 per cent of the average sum-of-the-parts valuation of `136 per share according to analysts, by FY11-end should lead to value-unlocking.