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PTC: Long term contracts boost margins - Views on News from Equitymaster
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PTC: Long term contracts boost margins
Jun 7, 2011

PTC has declared its fourth quarter and financial year 2011 (FY11) results. The company has reported a 17% YoY growth and 48% YoY growth in sales and net profits respectively for the fiscal. Here is our analysis of the results.

Performance summary
  • Net sales grow by 67% YoY and 17% YoY during 4QFY11 and FY11 respectively.
  • Operating margins improve to 1.5% from 0.8% in FY10. This is largely on account of 34% YoY growth in trading volume.
  • Despite higher operating margins, higher interest outgo and lower other income cap the growth in the net profit margins.
  • The company signed PPAs for 15,220 MW during FY11.


Standalone financial performance
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 12,430 20,787 67.2% 77,703 90,632 16.6%
Expenditure 12,340 20,444 65.7% 77,067 89,233 15.8%
Operating profit (EBDITA) 90 343 281.1% 636 1,399 120.0%
EBDITA margin (%) 0.7% 1.7%   0.8% 1.5%  
Other income 136 143 5.1% 737 628 -14.8%
Depreciation 14 13 -7.1% 55 50 -9.1%
Interest 1 1 0.0% 4 11 175.0%
Profit before tax 211 472 123.5% 1,314 1,966 49.6%
Exceptional items (4) (1)   (4) (2)  
Tax 77 138   374 575 53.7%
Effective tax rate 36% 29%   28% 29%  
Profit after tax/(loss) 134 334 148.8% 940 1,391 48.0%
Net profit margin (%) 1.1% 1.6%   1.2% 1.5%  
No. of shares (m)         294.5  
Diluted earnings per share (Rs)*         4.7  
Price to earnings ratio (x)         18.1  
(*On a trailing 12-month basis)

What has driven performance in 4QFY11?
  • PTC grew its sales by 17% YoY during FY11. This was largely a result of improvement in trading volumes that grew by 34% YoY to over 24,400 m units (MUs) at the end of FY11. We expect growth in PTC's trading volumes to remain strong over the next few years as well. We see the same growing by around 20% over the next three year. Execution of ongoing MoUs with power suppliers and buyers will lead this growth in trading volumes.

  • Ahead of the competition heating up further in the power trading business, PTC is in the process of diversifying its business by entering into long-term (spanning 10-35 years) contracts with power generators and buyers. While the ratio of long-term to short-term contracts stands at 30:70 currently (i.e., 70% of total volumes traded by PTC are short term in nature), the company aims to reverse it to 70:30 over the next 2 to 3 years. The total PPAs signed by the company as on March, 2011 were 15,220 MW (includes cross border trade). The cumulative contracts were for 12,356 MW.

  • PTC's operating margins improved from 0.8% in FY10 to 1.5% during the fiscal, largely on account of higher trading volumes and higher trading margin per unit. As per the new CERC rules, trading margins would not exceed 4 paisa a unit if the selling price of electricity is less than or equal to Rs 3 a unit. However, the ceiling of the trading margin has been raised to 7 paisa a unit if the selling price of electricity exceeds Rs 3 a unit. This has had a favorable impact on PTC’s margins.

  • Despite a decent growth in net sales, the growth in PTC's net profits were capped by lower other income and higher interest costs (up 175% YoY).

What to expect?
At the current price of Rs 85, the stock is trading at a multiple of 1 time our estimated FY13 book value per share. While PTC's topline for FY11 has come in above our estimates, the bottomlne performance has been marginally below our estimates. For future estimates of PTC, we have estimated traded volumes to grow at an average annual rate of around 20% over the next three years. Also, while the management estimates its volumes to surge to 50 bn units by FY13, we have been conservative and have estimated volumes by this time to be around 35 bn units. Our cautious approach takes into account any delays in generation and transmission capacity augmentation over the next 4 to 5 years, as also the pace of implementation of open access. Given the margin improvements in the offing, we reiterate our positive view on the stock from 3 to 4 year perspective.

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