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PTC India: Subdued demand impacts revenues - Views on News from Equitymaster
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PTC India: Subdued demand impacts revenues
Aug 25, 2015

PTC India declared its results for the quarter ended June 2015. Here is our analysis of the results.

Performance summary
  • Revenues declined by 10.7% YoY led by flat volumes as poor demand from the distribution company persists.
  • Operating profits grew by 3.8% YoY as realization improved from 4.2 paisa to 4.9 paisa.
  • Profit has risen by 10% YoY led by higher other income, better realizations and a lower tax rate.

Standalone numbers
Rs (m) 1QFY15 1QFY16 Change
Trading volume (MU) 10,309 10,265 -0.4%
Net revenue 36,895 32,962 -10.7%
Expenditure 36,320 32,364 -10.9%
Operating profit 576 598 3.8%
EBIDTA margin (%) 1.6% 1.8%  
Other Income 93 114 22.6%
Depreciation 10 9 -11.3%
Interest 0.7 1.3 85.7%
Profit before tax 658 702 6.6%
Exceptional items - 0.1  
Prior period expenses (2) -  
Tax 221 223 0.8%
Effective tax rate 33.6% 31.7%  
Profit after tax/ (loss) 436 479 10.0%
Net profit margin (%) 1.2% 1.5%  
No. of shares (m)   296  
Diluted earnings per share (Rs)*   1.6  
Price to earnings ratio (x)*   7.6  
*(Trailing 12 month earnings)

What has driven performance in 1QFY16
  • During the 1QFY16, the trading volumes have remained flat and have marginally declined by 0.4% on a Y-o-Y basis. The short term volumes have been impacted due to the sluggish demand from the State Electricity Board (SEBs). The SEB's have accumulated losses of Rs 2500bn and lose Rs 700bn every year as per the first report card of the National Democratic Alliance (NDA) government. Their dismal state and financial crunches have barred them to purchase power from the trading companies which have impacted the trading volumes.

  • As per a notification the Ministry of Power has revised the guidelines for Case 1 bids, wherein it has excluded power traders to participate in Long Term power selling agreements. This has also impacted the trading volumes and margins.

  • Short term volumes fell by as much as 11% YoY during the quarter. The segment contributed to about 63% of total volumes in the quarter. Long term volumes formed about a third of total volumes and grew by 12% YoY during the quarter. The company expects long term volumes to contribute to nearly half the volumes 2 to 3 years down the line. This would be a positive for the company considering that this is a relatively higher margin business segment.

  • The company has lost 1400 million units (MU) on account of transmission constraints. However the management stated that the problem of transmission constraint would reduce relatively by the end of this fiscal year.

What to expect?

At the current price of Rs 53, the stock is trading at a multiple of 0.60x its FY15 book value per share.

The company has entered into a long term sale agreement with Rajasthan State Electricity Board for sale of 500 megawatt (MW) of power. The project is set to be commissioned in FY17. The dispute with Tamil Nadu Generation and Distribution Corporation (TANGEDO) has been resolved by arbitration proceeding. TANGEDO has been stated to remit a sum of Rs 2.2bn in 4 installments and the same will be received in this fiscal year.

The company increased its presence in the portfolio management business for the Utilities segment, as it executed an agreement with Jharkhand Bijli Vitran Nigam Limited for managing its power portfolio. The agreement mandates PTC for sale / purchase of power for the Jharkhand based utility under bilateral, power exchanges and banking arrangements.

Going forward, the company will be focusing on its long term business, which it hopes to contribute to about 40% of overall volumes in the coming year and about half of the volumes a few years down the line. To achieve this, it plans to sign power purchase agreements (PPAs) to the tune of 1.6 GW, 2.6 GW in the next two years respectively.

In the near term, the trend in volumes in the short term segment will impact business growth. However, in the longer term the company's ability to improve margins and return ratios will be the key anchor for valuations.

While we had closed our position on the stock on the back of the recommendation period coming to an end, we had advised investors to hold on to the stock from a long term perspective. While we are not very enthused by the company's investment portfolio (those done in the power generation side of the sector), the fact remains that PTC India's cash position does remain comfortable. Also, what does provide some support is the value per share of its listed subsidiary PTC India Financial Services, which forms about 85% of the current price of PTC India's share. Not to mention that at the current levels, the dividend yield turns out to be about 4.2%. If we take into account the average dividend per share (DPS) of Rs 1.9 for the preceding three years, the dividend yield turns out to be 3.6%.

We would like to remind you that within the overall exposure to equities, you must ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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