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PTC India: Margin pressure continues - Views on News from Equitymaster

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PTC India: Margin pressure continues

Jul 23, 2007

Performance summary
  • Topline grows 11% YoY, despite 5% lesser electricity traded.

  • Operating margins down to 0.5%, from 0.8% in 1QFY07 on the back of decline in trading margins.

  • Pressure pared on net profits on the back of 25% higher other income and lower tax and depreciation costs.

Financial performance: A snapshot
(Rs m) 1QFY07 1QFY08 Change
Sales 10,421 11,586 11.2%
Expenditure 10,333 11,528 11.6%
Operating profit (EBDITA) 88 58 -34.2%
Operating profit margin (%) 0.8% 0.5%  
Other income 78 97 24.6%
Depreciation 8 7 -11.1%
Interest 3 3  
Profit before tax 155 144 -6.9%
Tax 35 25 -27.2%
Profit after tax/(loss) 120 119 -1.1%
Net profit margin (%) 1.2% 1.0%  
No. of shares   150.0  
Diluted earnings per share (Rs)*   2.3  
P/E ratio (x)*   40.3  
* On a trailing 12 months basis      

Company background
PTC was incorporated on April 16, 1999 with the objective of carrying out the business of purchase of electricity from state power utilities, licensees, generating companies, independent power producers and captive power plants. And in the process, selling the same to the state power utilities, licensees, bulk consumers, whether in private or public sector in India and abroad. Thus the business of the company is to buy power from power plants in surplus areas and sell it to entities in power deficient states.

What has driven performance in 1QFY08?
Realisations drive growth as volumes decline: PTC traded 2,481 million units (MUs) of electricity during 1QFY08, which was lower by 5% YoY. However, a near 18% YoY increase in realisations per unit traded helped the company grow its topline by 11% YoY during the quarter. Realisations increased from Rs 4 per unit traded in 1QFY07 to Rs 4.7 per unit traded in 1QFY08. During the quarter, PTC signed long-term agreements worth 788 MW for purchase of power. This took the cumulative capacity tied up through long-term projects to 7,984 MW, which shall entail strong trading volume in the future.

Lower trading margins dent operating margins: PTC earned an average trading margin of 4 paise per unit in 1QFY08, compared to the average of 5 paise per unit in 1QFY07. This impacted the company’s operating margins, which declined to 0.5%. As a matter of fact, through its order in January 2006, the CERC (Central Electricity Regulatory Commission) had fixed the trading margin at 4 paise per unit for electricity traders who have been given licenses for engaging in interstate trading of electricity. The Commission reasoned that nearly 90% of trading during FY05 was done at a trading margin of 5 paise per unit or less, but the same increased to a weighted average of 10 paise per unit in the first half of FY06. Also, it noted that up to FY05, trading margin of 5 paise per unit or less was a pre-dominant trend. However, trading margins shot up in the first half of FY06 and around 68% of volume traded carried a margin of 6 paise per unit. Notably, the instance of highest trading margin in a single transaction in FY05 was 43 paise unit, which touched 128 paise per unit in the first half of FY06.

We continue to 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 per unit, the margin works out to only 1% of the average cost of traded power at around Rs 4 per unit. This is much lower than around 3% margins on cost of power traded that is supposed to cover all risks (as per Crisil), and does not factor in the risks associated with third party transactions. Considering the sheer estimated growth in volumes in the future, any relief on this front will tremendously boost profitability of the PTC going forward.

Higher other income, lower taxes pare bottomline decline: Despite the sharp decline in operating margins, PTC managed top pare the pressure on its bottomline, which declined by a marginal 1% YoY. This was on the back of 25% YoY growth in other income and 27% YoY decline in tax expenses. As a matter of fact, the effective tax rate of the company declined from 22% in 1QFY07 to 17% in 1QFY08.

What to expect?
At the current price of Rs 94, the stock is trading at a multiple of 40.3 times its trailing 12 months earnings. Despite the fact that volumes and trading margins have been under pressure over the past 2-3 quarters, we believe that the signing of long-term contracts for power purchases and sales is a positive for the company. We see tremendous potential in the power trading business in India and PTC being the leader is likely to be one of the bigger beneficiaries of the industry growth. We had recommended PTC in November 2006 at Rs 50 with 2-year target of Rs 70, which has already been breached. In light of the changing industry scenario and the company’s long-term growth prospects, we shall soon review our recommendation on the stock.

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Mar 26, 2019 12:21 PM


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