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PTC: Other income spurs bottomline - Views on News from Equitymaster

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PTC: Other income spurs bottomline

Oct 24, 2008

Performance summary
  • Topline grows by 38% YoY in 2QFY09, 23% YoY in 1HFY09. Strong growth in traded volumes helps growth in topline.
  • Operating margins remain stable during both the periods under consideration.
  • Other income shoots up by almost 340% YoY during the quarter, aids net profits that surge 185% YoY.


Financial performance: A snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Units traded (m) 4,110 5,158 25.5% 6,591 7,848 19.1%
Sales 14,672 20,313 38.4% 26,258 32,344 23.2%
Expenditure 14,573 20,172 38.4% 26,105 32,144 23.1%
Operating profit (EBDITA) 99 141 42.0% 153 199 30.5%
Operating profit margin (%) 0.7% 0.7% 0.6% 0.6%
Other income 64 281 338.7% 161 457 184.2%
Depreciation 3 16 394.2% 6 31 400.6%
Interest 6 8 41.1% 9 17 83.5%
Profit before tax 154 398 157.8% 298 608 104.0%
Extraordinary income/(expense) (0) 0 (0) 0
Tax 39 70 79.2% 64 91 42.6%
Profit after tax/(loss) 115 328 184.6% 234 517 121.0%
Net profit margin (%) 0.8% 1.6% 0.9% 1.6%
No. of shares 150.0 227.1
Diluted earnings per share (Rs)* 3.4
P/E ratio (x)* 15.3
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • PTC grew its sales by 38% YoY during 2QFY09. This was aided by a 26% YoY growth in traded volumes, which stood at 5,158 m units during the quarter. PTC also recorded a 10% YoY increase in realisation, which aided the topline performance.

  • PTCís operating margins remained stable during both 2QFY09 and 1HFY09. The companyís margins per traded unit increased from 3.5 paise to 3.9 paise. Readers 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 PTCís 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.

    PTCís 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 PTCís 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 PTCís total trade in the future, we expect a nominal improvement in its margin FY10 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.

  • PTC recorded a stupendous 185% YoY growth in net profits during 2QFY09. This was on the back of strong growth in sales and substantially higher other income. A lower effective tax rate (18%, as against 25% in 2QFY08) also aided profitability during the quarter and first half.

What to expect?
At the current price of Rs 50, the stock is trading at a multiple of 16.2 times our estimated FY11 earnings for the company, which we might have to revise upwards, considering the stronger then anticipated 1HFY09 performance. Overall, we maintain our positive view on the stock from a 2 to 3 years perspective.

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