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PTC India: Other income spurs net - Views on News from Equitymaster
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PTC India: Other income spurs net
May 8, 2008

Performance summary
  • Topline grows 4% YoY in FY08, declines by 9% YoY in 4QFY08. Lower traded volumes dent fourth quarter performance.

  • Operating margins contract to 0.5% in FY08, from 0.8% in FY07 – regulated trading margins play spoilsport here.

  • Despite lacklustre topline and operating performance, net profits grow strongly during both 4QFY08 (up 231% YoY) and FY08 (up 38% YoY). Growth led by higher other income, and lower outgo for depreciation, interest and taxes.

  • Board recommends dividend of Re 1 per share (dividend yield of 1%).

  • Allots 77.4 m equity shares at a price of Rs 155 per share (aggregating to Rs 12 bn) to qualified institutional buyers during the quarter. Accordingly, the equity capital base increases substantially by 51%.

Financial performance: A snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Sales 6,025 5,466 -9.3% 37,667 39,062 3.7%
Expenditure 5,972 5,440 -8.9% 37,348 38,870 4.1%
Operating profit (EBDITA) 53 26 -50.0% 318 191 -39.9%
Operating profit margin (%) 0.9% 0.5%   0.8% 0.5%  
Other income 32 194 514.3% 193 429 122.2%
Depreciation 9 3 -62.4% 33 13 -62.0%
Interest 2 1 -43.5% 20 17 -15.8%
Profit before tax 73 215 193.7% 459 591 28.8%
Extraordinary income/(expense) (0) (0)   - (1)  
Tax 15 23 52.0% 106 102 -3.8%
Profit after tax/(loss) 58 192 231.2% 352 487 38.3%
Net profit margin (%) 1.0% 3.5%   0.9% 1.2%  
No. of shares       150.0 227.1  
Diluted earnings per share (Rs)       1.6 2.1  
P/E ratio (x)         42.4  

What has driven performance in FY08?
Volumes led topline growth: PTC traded 3.6% YoY higher number of electricity units during FY08. This growth was lacklustre owing to the company’s second half performance, where volume actually declined by 10% YoY. The management has attributed this decline in volumes to non-commissioning of power plants as expected and increased demand from surplus states (so less number of units sent out). As for the average realisation, it increased by a marginal 0.1% YoY during FY08.

During the fourth quarter, PTC signed MoUs worth around 5,280 MW for purchase of power for its long-term business. The company has signed power purchase agreements for an aggregate capacity of 10,500 MW, which shall entail strong trading volume in the future. The company is working towards a portfolio that has 70% capacity under long term trades (25 to 30 years agreements) and 30% under short term.

Lower trading margins impact operating profitability: PTC earned an average trading margin of 4 paise per unit in FY08, compared to the average of 5 paise per unit in FY07. Readers would do well to note that, through its order in January 2006, the CERC fixed the trading margin at 4 paise/kWh for electricity traders who have been given licenses for engaging in interstate trading of electricity. The effect of fixation of trading margins at 4 paise/kWh has been clearly visible in PTC’s numbers over the past few quarters. We believe that the move to fix margins could be construed as a sign of excessive regulation in a sector that is yet to take off. At 4 paise/kWh, the margin works out to only 1% of the average cost of traded power at around Rs 4/kWh. This is much lower than around 3% margins on cost of power traded that is supposed to cover all risks, and does not factor in the risks associated with third party transactions.

PTC’s management has indicated that, since trading margin has to be based on cost plus risk (as risk in dealing with one client differs from risk in dealing with the other), a higher risk trade must entail higher margins. Since the matter is still pending in the Supreme Court, we have factored in trading margin at the capped rate of 4 paise/kWh for PTC’s trades in the next 2 years. However, since this 4 paise margin applies to short-term trade, which is expected to reduce in proportion to PTC’s total trade in the future, we expect a nominal improvement in its margin FY10 onwards (as the company will have the flexibility to fix margins on power traded on a long-term basis). Considering the sheer estimated growth in volumes in the future, any relief on this front will tremendously boost profitability of the company.

Higher other income aids bottomline: Despite the contraction in operating margins, PTC grew its net profits by 38% YoY during FY08. This was on the back of a 122% YoY growth in other income and decline in effective tax rate (from 23% in FY07 to 17% in FY08).

What to expect?
At the current price of Rs 91, the stock is trading at a multiple of 42.4 times its FY08 earnings. The company allotted 77.4 m equity shares at a price of Rs 155 per share (aggregating to Rs 12 bn) to qualified institutional buyers during the fourth quarter. Subsequently, the equity capital base increased substantially by 51%. These funds shall be used for financing the company’s business development requirements, including those of its recently floated financial services arm – PTC India Financial Services Ltd. where global investment banks like Goldman Sachs and Macquarie Bank have picked up 20% stake each. These funds will also be utilised for strengthening the balance sheet by way of pushing up the capital base as the company expects a substantial rise in its trading volume going forward. We shall soon update our research report on the company to factor in the FY08 actual numbers and estimates for FY11.

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