Recommendations » India

PTC India report : PTC India Financial Services gets IFC status

Contributed by Angel Broking

By Angel Broking

PTC India Financial Services (PFS), a subsidiary of PTC India, has been given the infrastructure financial company (IFC) status by the Reserve Bank of India (RBI). The RBI had earlier classified non-banking financial companies (NBFCs) under three categories, namely asset finance companies, loan companies and investment companies. Recently, the RBI introduced a fourth category of NBFCs, i.e. IFCs. Post this development, PFS would be allowed to have a higher exposure to lending and investment to a single borrower or a group of borrowers. Further, PFS would have better access to resources as the exposure limit for banks’ funding to IFCs has been improved. At the CMP of Rs119, PTC India is trading at 23.5x FY2011E and at 18.2x FY2012E earnings. We maintain our Buy recommendation on the stock with an SOTP fair value of Rs136.

About PFS: PFS is a 77.6% subsidiary of PTC India. The company was set up in FY2008 as a special purpose investment vehicle primarily to make both equity and debt investments in power projects in the areas of generation, transmission and distribution. As of 1QFY2011, PFS had sanctioned Rs1,953cr under debt and Rs500cr under equity, while the disbursements under these heads stood at Rs480cr and Rs398cr, respectively. PFS currently has a net worth of Rs650cr as of 1QFY2011.

Implications of the development: We believe this development will prove to be positive for PFS, as:

- PFS can now raise ECBs up to 50% of its net worth through the automatic route and raise funds through tax-free infrastructure bonds.

- PFS can now take up additional lending exposure, up to 5% of its owned funds, in case of a single borrower and 10% for a group of borrowers.

- PFS will be able to raise higher resources as banks have been allowed lesser risk weightage on lending made to IFCs. Exposure of banks has recently been increased to 20% of its capital funds w.r.t IFC from the earlier 15%.

- Cost of borrowings for PFS will be reduced by ~50bp.

PFS’s shareholding pattern

PTC India holds a 77.6% stake in PFS, whereas the remaining 22.4% is shared equally by Goldman Sachs Strategic Investments Limited (GSSI) and Macquarie Group Limited (Macquarie).

PFS financial performance in FY2010

PFS recorded net sales of Rs49cr in FY2010, up 372% on a yoy basis. The company’s EBITDA and PBDT rose by 487% and 323% to Rs43.6cr and Rs36.7cr, respectively. Growth was largely driven by higher level of loan disbursement (both term loan and mezzanine/short-term loan) to power projects and increased fee-based income. During FY2010, the company sanctioned funds aggregating to ~Rs1,510cr to 22 power projects. During the year, the company also started upfront financing for carbon credits.

Investment arguments

Power deficit to encourage growth

The total volume of power traded in India is just 8% of the power generated, as reported by the power ministry in 2010. 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, such as PTC India.

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

PTC India to maintain its market leadership position

PTC India 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 on account of 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 power trading, PTC India has also entered into other businesses such as financing fuel intermediation, power tolling agreements and consultancy. PFS has expanded its business considerably in the past two years.

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

Outlook and valuation

Going ahead, we believe PTC India's emphasis on the long-term trade (LTT) segment will help it in sustaining higher growth. During FY2010, STT constituted 50% of the total power traded by the company. PTC India 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.

Following the commissioning of new power projects, we expect PTC India to register a 32.7% CAGR in its top line over FY2010–12E. We estimate the company’s bottom line to register a 43.1% CAGR over FY2010–12E.

At the CMP of Rs119, PTC India is trading at 23.5x FY2011E and 18.2x FY2012E earnings. We have arrived at an SOTP fair value of Rs136 for PTC India, wherein we have assigned P/E of 10x FY2012E earnings from the core trading business (Rs65.2/share), while investments in PFS, Teesta Urja, Krishna Godawari and Athena Energy Ventures have been valued at P/BV of 1x FY2012E (Rs49.4/share). The cash and liquid investments in the company's books are valued at P/BV of 1x FY2012E (Rs21.1/share). Accordingly, we maintain our Buy recommendation on the stock.