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Is PTC India a dud stock? - Views on News from Equitymaster
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Is PTC India a dud stock?
Dec 29, 2011

With debtor days doubling, customers (state governments) in a political flux and payments delayed for prolonged period, the country's only listed power trading entity PTC India Ltd is no longer an investor's delight. The stock has corrected by 68% in 2011 and 54% since we recommended it earlier this year. But does that make worthy of being relegated to a dud stock status?

The company certainly has a simple and a sustainable business model. Being a government entity, funding for capex is not a problem. However, its profit margins and return ratios that are in single digits inspire little confidence to a lay investor.

Do not get us wrong! We are certainly not building the case here for changing our view on PTC India to negative. On the contrary what we trying to get at is why PTC India is a relatively safer bet in the beleaguered Indian power sector. In fact it could be one of the earliest beneficiaries of potential reforms in the sector.

The power sector in India is currently facing unprecedented hurdles due to lack of coal supply, rise in prices of imported coal and accumulation of huge losses in State Electricity Boards (SEBs). PTC India being the largest in power trading certainly has huge upsides in the long term as growth of power generation and power trading is essential for the country's economic rejuvenation. The good thing is that unlike other players in the power sector, PTC India is not a highly leveraged company. Hence risks to its balance sheet are muted to that extent.

Having said that, most of the power distribution companies (discoms) are delaying the payment for electricity purchased from traders. This in turn is putting stress on the working capital of trading entities as they have to make prompt payments to power generators. Discoms like Tamil Nadu Electricity Board (TNEB) and Uttar Pradesh Power Corporation (UPPCL) have delayed payments to PTC India for the electricity purchased earlier. However, the management has reiterated that while the delay has stretched the company's working capital, the funds will be recovered. The fact that the company's debtor days doubled from 40 in March 2011 to 96 in September 2011 was the highlight of the market's disdain for the stock. However, we believe that this is a temporary phenomenon. PTC's power generation plans should also fructify in FY12 as coal supplies get regularized by the government.

Nevertheless, in anticipation of lower trading volumes (due to lower generation of power) and pressure on margins, we have revised our estimates for PTC. Taking into account the likelihood of return ratios remaining in low single digits rather than moving closer to double digits (as expected earlier) we have also been conservative on the valuation band. Our revised estimates for the stock are based on the premise that while the growth of PTC's business is certain, it may take longer for the markets to award it the valuations that it deserves for the same.

Given the fact that the long term fundamentals of PTC's business remains intact and that its balance sheet is resilient to interest rates, we would recommend that you average out your purchase cost for the stock of PTC at the current attractive valuations. Having said that, please ensure that your exposure to the stock does not exceed 3 to 4% of your total portfolio.

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