By Angel Broking

PTC India (PTC) reported impressive results on the operating front in 1QFY2011, registering 85.3% yoy growth in operating profit to Rs27.8cr. Growth was primarily driven by robust 36.7% yoy growth in sales volume to 5,747MU. The improvement in sales was aided by a substantial increase in power traded under the long-term route and from captive power plants. Going ahead, we expect the company’s trading volume to be boosted by additional volumes from the long-term route, with 4,500MW of projects for which PPAs have been signed getting operational during FY2011–12. The company’s operating margin is also expected to expand going ahead, as old contracts on which trading margins were charged at lower 4 paise/unit would be renegotiated at higher trading margins of 7 paise/unit. We maintain a Buy on the stock.

Increased trading volume boosts top line: PTC’s 1QFY2011 top line grew by 16.3% yoy to Rs2,758cr due to a substantial 36.7% yoy increase in trading volume to 5,747MU. The company’s OPM improved by 40bp yoy to 1%, aided by increased cap on short-term trading margins to 7 paise/unit. However, on the bottom-line front, the company’s net profit declined by 16.6% yoy to Rs27.8cr (Rs33.3cr) on account of lower other income (down by 50% yoy to Rs13.8cr) and higher tax expense. During 1QFY2010, the company booked the profit out of the maturity of certain investments based on tax-free fixed maturity plans.

Outlook and Valuation: The new trading margin regulations will have a positive impact on PTC’s bottom line, as the company generates higher volumes by short-term trading (where the margin was earlier capped at 4 paise per unit). At the CMP of Rs113, PTC is trading at 22.2x FY2011E and at 17.2x FY2012E earnings. We have arrived at an SOTP fair value of Rs136 for PTC. We maintain our Buyrecommendation on the stock.

Conference call highlights

During 1QFY2011, the company signed PPAs and MoUs for 667MW and 610MW of power, respectively. As of 1QFY2011, total PPAs and MoUs signed by the company currently stand at 16,400MW and 14,500MW, respectively. Cumulative power sale agreements (PSAs) stand at approximately 5,000MW.

As of 1QFY2011, PTC Financial Services (PTC-FS), the company’s subsidiary, has sanctioned Rs1,953cr under debt and another Rs500cr under equity. Of the total amounts sanctioned, the amount disbursed under debt and equity routes stands at Rs480cr and Rs398cr, respectively.

PTC plans to add 600MW of capacity under the LTT route in FY2011E, while approximately 4,000MW is expected to be added to LTT in FY2012E.

Investment Arguments

Power deficit to encourage growth

The total volume of power traded in India is just 8% of the power generated. We expect the volume of power traded to rise at a healthy rate of 14% due to the continuing power deficit and increased power generation capacity.

Favourable government policies to aid growth The National Electricity Policy encourages about 15% of new capacities to be tied up in the short-term market. Growing emphasis on allowing open access to consumers to buy power from producers in any state augurs well for power trading companies.

In January 2010, the CERC had increased the cap on short-term trading (STT) margin to 7 paise/unit from the earlier 4 paise/unit, which is a major boost to profitability as the 4 paise/unit cap regime was inadequate to cover the operational and market risks borne by trading companies.

PTC to maintain its market leadership position

PTC is currently the leader in power trading with a market share of 45–50%. Going ahead, we expect the company to maintain its leadership position in the power trading market due to its early mover advantage and increased volume of power traded under the long-term trade route, as close to 4,500MW of projects for which the company has signed PPAs are set to be operational in FY2011 and FY2012.

Transforming into an integrated player in the power sector

Apart from trading, PTC is also entering other businesses such as financing fuel intermediation, power tolling agreements and consultancy. PTC-FS, the company’s financial services arm in which it has a 77.4% stake, has expanded its business considerably in the past one year.

PTC, through its subsidiaries, is also looking at acquiring coal mines abroad to aid its fuel intermediation and power tolling business.

Outlook and Valuation

We believe PTC's emphasis on the LTT segment will help it in sustaining higher growth, going ahead. During FY2010, STT constituted 50% of the total power traded by the company. PTC proposes to increase its power trading mix to 70:30 in favour of LTT. The company's increased focus on LTT is expected to provide consistent cash flows compared to STT, as the number of units generated is expected to be uniform, resulting in reduced volatility. We expect PTC to register a 32.7% CAGR in its top line over FY2010–12E, following the commissioning of new power projects. We estimate the company’s bottom line to register a 43.1% CAGR over FY2010–12E.

At the CMP of Rs113, PTC is trading at 22.2x FY2011E and 17.2x FY2012E earnings. We have arrived at an SOTP fair value of Rs136 for PTC, wherein we have assigned P/E of 10x FY2012E earnings from the core trading business (Rs65.2/share), while investments in PTC-FS, Teesta Urja, Krishna Godawari and Athena Energy Ventures have been valued at a P/BV of 1x FY2012E (Rs49.4/share). The cash and liquid investments in the company's books are valued at a P/BV of 1x FY2012E (Rs21.1/share). Accordingly, we maintain our Buy recommendation on the stock.