Stock Review: PTC India Financial Services (PFS)

 

The stock of PTC India Financial Services (PFS) has lost more than one-third of its IPO value since listing on March 30. The sharp drop can be attributed to the aggressive pricing at the time of IPO and lack of visibility over the monetisation of its equity investments in power projects. However, a further fall in its valuations looks limited, given its sound fundamentals.

Unlike other power financing companies such as Power Finance Company (PFC) and Rural Electrification Corporation (REC), PFS also makes equity investments in power projects. As on March 31, the company had an outstanding debt investment of . 675 crore and outstanding equity investment of . 460 crore in eight different projects.

At present, the company's debt-to-equity ratio of 0.6 is way lower than the average of five for other power finance companies. The management plans to increase the ratio to four by FY13. This will allow the company to increase its loan book to at a compounded annual rate of 93% in the next two years.

Despite rising interest rates, the company's cost of borrowings remained stable at 10.5% in FY11. Given the company's plan to raise money through external commercial borrowings at 7%, interest cost may fall to 10% in FY12.

PFS targets a minimum rate of return of 18% on its equity investments. While exiting from the invested companies, PFS has the option of promoter buyback at a fixed IRR or that of the IPO route. For instance, it monetised a part of its stake in Indian Energy Exchange (IEX) last fiscal. It will monetise the remaining 5% stake by October 2011, which may fetch over . 55 crore.

PFS has invested over two-third of its equity portfolio in three big projects. Of these projects, the East cost project has received environment clearance after facing some issues on that front, according to the management, and will commission as per schedule in FY14. The other two projects — Ind Bharat Utkal and Meenakshi — are also on schedule.

At the current market price, the company is trading at a price-to-book value of 1.5, which is in line with REC and PFC which are trading at P/B of 1.5 and 1.6, respectively. Growth in loan book and timely commissioning of its invested projects will serve as major triggers for PFS in the medium term.