Stock Review: Power Trading Corporation (PTC)

 

A string of capacity additions and the IPO of its subsidiary to unlock value keep the Power Trading Corporation highly charged. But maintaining the margin momentum will be a real test

 

INDIA'S largest power trading company, Power Trading Corporation (PTC), is launching an initial public offer of its subsidiary, PTC Financial Services, which will unlock value. This, along with the large power trading volume that would be added due to significant capacity addition in coming years, makes PTC worth to look at.

BUSINESS:

Established in 1999, PTC is India's largest power trading utility with a market share of around 45%. Between FY05 and FY07, it lost its market share in the power trading business from 70% to 40%, but has recovered since then. The drop in the market share in the power trading business triggered the company's decision to diversify into power financing and power tolling business through its subsidiaries, PTC Financial Services (PFS) and PTC Energy (PEL), respectively. This has allowed it to have access to more than 12 GW power capacity.

   The promoters jointly hold 16.3%, with each holding 4.075% share and the balance 83.7% is held by power entities, financial institutions, Life Insurance Corporation of India and other insurance companies, private utilities and others, including the general public at large. CERC has capped the margins for short-term trades at 7 paise per unit for energy traded above 3 per unit and 4 paise per unit for trades below it. The margin on long-term trades is uncapped. Cross-border trade accounts for 30% of PTC's volumes and has lower margins of 2.5 paise per unit. In this, PTC collects power from Bhutan and Nepal governments under long-term bilateral arrangement and sells in India.

FINANCIALS:

On the back of good volume growth, the company has been able to grow its net sales at a compounded annual growth rate of 26% to 7,800 crore from FY08 to FY10. During the same period, the net profit margin has grown at a CAGR of 29% to 112.7 crore. Being in the trading business, the company has low operating and net profit margins of 2.3 and 1.5, respectively, and had a return on capital employed ratio of 8.5 in FY10, which has increased gradually from 5.74 in FY08. Considering the nature of the business, the company has a very short working capital cycle of close to five days. Its healthy balance sheet with a debt to equity of less than 0.1 in FY10 would allow it to take more debt to grow in the financing business.

GROWTH DRIVERS:

Trading business is a function of volume growth and margins. Large capacity addition of around 180 GW by FY17 would lead to an increase in power generation. Out of this, more than 50% is going to be added by private players who have around 20% of their total capacity reserved for merchant sales. This would boost the overall volumes traded in coming years. Despite the falling market share, the volume traded by PTC has improved at a CAGR of over 19% in the past 5 years. First nine months of FY11 trading volumes of 19 billion units have already surpassed its volumes in FY10. The company's subsidiary, PFS, is expected to be listed in the near future. With a view to improving margins, the company is trying to derive an increasingly higher share from long-term contracts.

CONCERNS:

Major concerns include the limit in the ability to increase the margins. In fact, maintaining the margin can also be a challenge. The competition from the private players will continue to put pressure on margins. Delays in power capacity additions can also affect the expected volume growth.

VALUATIONS:

There are not many companies, which can be compared with PTC. At the current market price of 89.6, the company's scrip is trading at price-toearning multiple of 31.5 and price to book value of 1.55.