Stock Review: PTC India

PTC India (PTC) has announced that its 77.6 per cent subsidiary, PTC Financial Services (PFS), is likely to go for an initial public offer (IPO) of 127.5 million fresh shares by the end of 2010-11. Reports suggest the issue size is likely to be `500-1,000 crore. This will almost double PFS' 2009-10 net worth of

`640 crore and give it more headroom to leverage (up to six times, according to analysts), as its debt was acting as a constraint for expansion.

PFS plans to tap various debt sources, including external commercial borrowings and domestic bonds. The Reserve Bank of India's decision to grant it an infrastructure finance company status makes allows it to issue tax-free bonds and thus leverage at a lower cost.

In the first half of 201011, PFS reached the 2009-10 net profit of `25 crore. Sanctions and disbursements (including equity and debt) of

`2,600 crore and `1,000 crore, respectively, for funding 12,000-Mw projects point to more opportunities and greater visibility of business.

Consequently, analysts have upgraded the valuation multiple from one time to 1.5 times price to book value. This augurs well for PTC India, the largest shareholder in PFS with a 60 per cent stake, even after the IPO. Another subsidiary, PTC Energy (PEL), is also gaining strong traction. The 350-Mw tolling arrangement will significantly boost profitability from 2011-12. Both PFS and PEL form 30 per cent of the sum-of-the parts valuation of PTC.

Meanwhile, analysts are bullish on the long-term prospects of PTC's core business due to robust volume growth expected in trading, healthy margins on account of the company's focus on higher margin-less volatile long-term contracts (targeted mix of 70:30), 75 per cent increase in cap for margins in short-term contracts (currently 50 per cent of total volume traded) and diversification in other areas. At 11 times 2011-12 average estimated consolidated earnings, the stock provides a good upside potential.

Besides strong prospects for power trading, listing of subsidiaries is a positive trigger