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

Stock Review: BGR Energy

BGR Energy has underperformed the Sensex since the second half of November, despite the company denying its involvement in the bribe-for-loans scam. Analysts view this as a 'buying opportunity' because fundamentals remain robust and valuation reasonable at 15 times FY12 average estimated earnings. Based on the average target price of `880, the stock provides an upside potential of 25 per cent from the current levels of `715.

Analysts are positive on the transformation of its business model from balance of-plant (BoP) projects to full fledged power plant engineering-procurement-construction (EPC) contracts. Further, the joint venture with Japan-based Hitachi to manufacture boiler-turbine-generators (BTGs) is comparable to heavyweights such as Larsen & Toubro and BHEL in upcoming tenders. Thus, BGR's unique position to provide the whole package of BOP, EPC and BTG makes it the best pick in the power equipment space.

The company is also geared for strong growth due to its robust order backlog, comprising mainly two EPC projects (Rajasthan and Tamil Nadu state electricity boards) worth `8,000 crore, or 76 per cent of the total order backlog of `10,500 crore. These two projects are at advanced stages of execution.

The company is also awaiting the outcome of bids submitted for two projects of RRVUNL (Rajasthan Rajya Vidyut Utpadan Nigam) worth `6,000-7,000 crore each, and the NTPC bulk tender for boiler ( `11,000 crore) that will help fuel growth beyond FY12. It is also focusing on private power producers and other state electricity boards which are expected to come up with tenders.

Analysts are confident of the management's guidance of `12,000-15,000 crore order inflows in FY11 and 50 per cent growth in sales and profit in both FY11 and FY12. However, year-on-year growth in revenues during the second half of FY11 is likely to be affected by the high base of the first half of FY10, though operating profit margin will be between 11 per cent and 11.5 per cent. High working capital requirements and competition in the BTG market are key risks.

The stock's underperformance over the last two months is being seen as a 'buying opportunity'

Stock Review: Voltas

The outlook on Voltas's electro-mechanical project (EMP) business —comprising 65 per cent of the total sales — has turned positive. The company is optimistic about the order inflow in this segment, as activity is picking up in the Middle East (about 60 per cent of the total EMP revenues). It is partly due to high crude oil prices resulting in higher infrastructure spending and commercial activity. The domestic EMP market, driven mainly by commercial real estate, is also recovering, albeit slowly.

International orders — 70 per cent of the total order backlog (5,000 crore) —mainly consist of the Middle East market, catering to Abu Dhabi, Dubai and Qatar. Voltas is also trying to increase exposure in Saudi Arabia and Oman. The company recently formed a 50:50 joint venture (JV) with Saudi Arabia-based Olayan Financing Company, which will be operational from April 2011.

Saudi Arabia is a lucrative market for Voltas due to its strong gross domestic product growth. The EMP market is almost the size of the GCC market and a lot of investments in infrastructure are planned. The JV will take up EMP projects and subcontract the same to Voltas for design, supply of equipment and project execution.