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PTC: 'Regulated' growth

Nov 9, 2006

Performance summary
India's largest power trading company, PTC India, had recently announced mixed results for the second quarter and first half ended September 2006. For 2QFY07, while revenues have grown by 53% YoY, significant contraction in operating margins has led to bottomline declining by 9% YoY. Pressure on margins has been brought about by higher electricity purchase costs and restriction on trading margins. The performance for the first half has been similar with topline growing at a robust pace and bottomline getting impacted due higher costs.

Financial performance: A snapshot…
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Sales 8,620 13,147 52.5% 12,993 23,568 81.4%
Expenditure 8,478 13,051 53.9% 12,769 23,384 83.1%
Operating profit (EBDITA) 142 96 -32.7% 224 183 -18.1%
Operating profit margin (%) 1.6% 0.7% 1.7% 0.8%
Other income 13 39 203.9% 80 117 47.7%
Interest 4 7 78.0% 5 10 88.7%
Depreciation 9 8 -3.5% 17 16 -4.2%
Profit before tax 142 119 -16.5% 281 275 -2.3%
Extraordinary income/(expenses) (2) - (2) (1)
Tax 45 32 -28.2% 71 67 -5.5%
Profit after tax/(loss) 95 87 -9.1% 208 207 -0.8%
Net profit margin (%) 1.1% 0.7% 1.6% 0.9%
No. of shares 150.0 150.0
Diluted earnings per share (Rs)* 2.7
P/E ratio (x)* 18.9
* On a trailing 12-months basis

What is the company's business?
PTC was incorporated in April 1999. 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 FY02 to FY06, PTC grew its net sales and profits at compounded rates of 54% and 41% respectively.

What has driven performance in 2QFY07?
Realisations drive growth: The strong 53% YoY growth in PTC's topline during 2QFY07 has been a result of growth in both volumes and realisations. The company sold 3,268 m units (MUs) in the quarter against 3,148 MUs in 2QFY07. The price realised per MU was over Rs 4.0 in 2QFY07 against Rs 2.7 in 2QFY07 (47% YoY growth). The company's sales in north India grew by 54% YoY during the first half (58% of total volume sales). If one were to look at the adjacent graph, it becomes clear that PTC's sales are particularly strong in the second and third quarters. Post-monsoon generation in eastern India (supplier of electricity) and pickup of industrial activities in the north and west regions (buyers of electricity) seem to be the reason for this quarterly skewness in PTC's sales.

High purchase costs dent margins: PTC's is a fixed margin business because, as per recent regulations, the company can charge only 4 paise per unit traded. If one were to analyse the company's purchase and sales performance in 2QFY06 and 2QFY07, it becomes clear that the margin per unit traded has declined from 5 paise to 4 paise. And this has hurt the company on the profitability front, as EBIDTA margins have contracted to less than 1% (0.7%) in 2QFY07. Readers should note that power trading is a volume business and margins are very low here (PTC's average EBIDTA margins during the past five years have been 1.7%).

Lower operating margins impact bottomline: Despite the strong growth in topline during the quarter, the substantial fall in operating margins has impacted PTC's net profits, which have declined by 9% YoY. Decline in depreciation and tax expenses has, however, pared the overall pressure on the bottomline during 2QFY07.

What to expect?
At the current price of Rs 51, the stock is trading at 18.9 times its trailing 12-month earnings. But for the pressure on profitability due to the regulatory impact on trading margins, we are enthused about the company's volume growth. The increasing demand of power in the northern and western regions of India and the continued (though slow) addition to generation capacity in the east and northeast is what will drive PTC's growth in the future. The company has signed up long-term power purchase agreements for 6,700 MW and sale agreements for 6,000 MW. These will, however, start bearing fruit only 2-3 years down the line.

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Dec 6, 2021 03:36 PM