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PTC India: Long term trades hold key - Views on News from Equitymaster
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PTC India: Long term trades hold key
Oct 24, 2007

Performance summary
  • Topline grows 12% YoY in 2QFY08, 11% YoY in 1HFY08.

  • Operating margins stable during the quarter, decline by 0.2% during the first half.

  • Higher other income aids bottomline, which grows by 32% YoY and 13% YoY during 2QFY08 and 1HFY08 respectively.

  • Board approves proposal to raise Rs 12 bn through the QIB (Qualified Institutional Buyers) route.

Financial performance: A snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 13,147 14,672 11.6% 23,568 26,258 11.4%
Expenditure 13,051 14,573 11.7% 23,384 26,105 11.6%
Operating profit (EBDITA) 96 99 3.7% 183 153 -16.7%
Operating profit margin (%) 0.7% 0.7%   0.8% 0.6%  
Other income 39 64 65.8% 117 161 36.8%
Depreciation 8 3 -61.0% 16 6 -61.5%
Interest 7 6 -21.9% 10 9  
Profit before tax 119 154 29.9% 275 298 8.5%
Extraordinary income/(expense) - (1)   (1) (1)  
Tax 32 39 21.5% 67 64 -3.8%
Profit after tax/(loss) 87 114 31.8% 207 233 12.5%
Net profit margin (%) 0.7% 0.8%   0.9% 0.9%  
No. of shares         150.0  
Diluted earnings per share (Rs)*         2.5  
P/E ratio (x)*         40.9  
* On a trailing 12 months basis

Company background
PTC was incorporated in April 1999, and was formed by Power Finance Corporation, Power Grid Corporation of India Limited, NTPC and NHPC. The company was started with the objective of carrying on the business of purchase of electricity from state power utilities, licensees, generating companies, independent power producers, captive power plants, and selling the same to the state power utilities, licensees and bulk consumers, whether in private and public sector in India and abroad. PTC has a first mover advantage in power trading in India, and currently has over 25 customers who are either trading power or have traded power through the company. The company has also has been appointed as the nodal agency for cross-border trades in power with Nepal and Bhutan. During the period between FY03 to FY07, PTC grew its net sales and profits at compounded annual rates of 42% and 35% respectively.

What has driven performance in 2QFY08?
Volumes drive topline: PTC recorded its highest ever quarterly trade of electricity during 2QFY08. The company traded 4,110 million units (MUs) of electricity during the quarter, which was 26% higher than its trade in 2QFY07. However, this strong surge in volumes did not pass through the revenue in its entirety as realisations (revenue per unit of electricity traded) recorded 11% YoY decline. During the quarter, PTC signed long-term agreements worth around 2,700 MW for purchase of power. This took the cumulative capacity tied up through long-term projects to over 10,000 MW, which shall entail strong trading volume in the future. We expect PTC’s electricity trading volumes to grow at a CAGR of 23% during the period FY07 to FY10. During 1HFY08, the company has already achieved 60% of our estimated FY08 trading volumes.

Higher cross-border trades dent margins: PTC earned an average trading margin of 3 paise per unit in 2QFY08, compared to the average of 4 paise per unit in 2QFY08. As per the management, this was owing to higher share of trades from Bhutan, which carried average margins of 2.5 to 2.75 paise per unit. This was because the Bhutanese trade did not involve any marketing expense from the company and, as such, the component was not earned back in terms of trading margins.

Investors 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 FY09 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, lower taxes aid bottomline: Despite stable operating margins, PTC managed to grow its net profits at a rate faster than topline growth during both 2QFY08 and 1HFY08. This was on the back of 66% YoY growth in other income and decline in effective tax rate (from 27% in 2QFY07 to 25% in 2QFY08).

What to expect?
At the current price of Rs 106, the stock is trading at a multiple of 15.8 times our estimated FY10 earnings. PTC’s board has approved the proposal to raise Rs 12 bn through the QIB (Qualified Institutional Buyers) route. As the management indicated in yesterday’s analyst meet, these funds shall be used for financing the company’s business development requirements, including floating a financial services arm – PTC India Financial Services Ltd. These funds will 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. As a matter of fact, this equity issue of Rs 12 bn will be almost 75% of the company’s current market capitalisation.

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 maintain our view on the stock from a long-term perspective.

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