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PTC India: Profits up despite pricing pressures - Views on News from Equitymaster

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PTC India: Profits up despite pricing pressures
Aug 25, 2011

Power Trading Corp (PTC) India declared its first quarter results for financial year 2011-12 (1QFY12) results. The company has reported a 10% YoY fall in net sales while the profits grew by 62% YoY. Here is our analysis of the results.

Performance summary
  • Net sales fall by 10% YoY in 1QFY12 despite 17% YoY growth in the number of units of electricity sold during the quarter.
  • Operating margins improve to 1.9% from 1.0% in 1QFY11. This is largely on account of growth in trading volume.
  • Higher other income and lower depreciation charges propel the growth in the net profit margins.
  • The cumulative PPAs signed by the company as on June 2011 stood at 15,370 MW, with 150 MW having been added in the June quarter.


Standalone financial performance
(Rs m) 1QFY11 1QFY12 Change
Net sales 27,576 24,874 -9.8%
Expenditure 27,307 24,398 -10.7%
Operating profit (EBDITA) 269 476 77.0%
EBDITA margin (%) 1.0% 1.9%  
Other income 147 174 18.4%
Depreciation 12 11 -8.3%
Interest - 14  
Profit before tax 404 625 54.7%
Exceptional items - -  
Tax 125 173 38.4%
Effective tax rate 31% 28%  
Profit after tax/(loss) 279 452 62.0%
Net profit margin (%) 1.0% 1.8%  
No. of shares (m)   294.9  
Diluted earnings per share (Rs)*   5.2  
Price to earnings ratio (x)   13.5  
(*On a trailing 12-month basis)

What has driven performance in 1QFY12?
  • PTC saw a drop in its net sales by around 10% during 1QFY12. This was despite 17% YoY growth in trading volumes that grew to over 6,700 m units (MUs) in 1QFY12. Revenue for the quarter was lower due to decrease in average purchase and sale price for 1QFY12 to Rs 3.6/kWh and Rs 3.7/kWh as against Rs 4.8/kWh and Rs 4.7/kWh in 1QFY11 respectively Lower margins were primarily due to competitive pressures from traders like NVVN (promoted by NTPC), in trading margins (at less than 4 paisa a unit) which forced PTC to charge lower margins for some of its short term trades.

    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 power sale agreements (PSAs) signed by the company as on June, 2011 were 5,409 MW (includes cross border trade). The cumulative MOU contracts were for 12,736 MW.

  • PTC's operating margins improved from 1.0% in 1QFY11 to 1.9% during 1QFY12, largely on account of higher trading volumes. 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.

  • PTC had outstanding dues to the tune of Rs 5 bn from Tamil Nadu Electricity Board (TNEB), part of which is expected to be received in 2QFY12. Power supply to TNEB has been suspended till dues are cleared.

What to expect?
At the current price of Rs 70, the stock is trading at a multiple of 0.8 times our estimated FY14 book value per share. 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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