Power Trading Corporation

Type	Public Issue	Min. subscription	200 shares
Size	Rs 812 m to Rs 928 m	Lead Managers	SBI Capital Markets Ltd and ENAM Financial Consultants Pvt Ltd
Offer Price	Rs 14 to Rs 16	Listing	BSE & NSE
Face Value	Rs 10 per share	Promoters	NTPC, NHPC, PFC and Power Grid
Shares on offer	58 m shares	Pre/Post-issue promoter holding	32%
Bid/Issue opens on	March 1, 2004	Bid/Issue closes	March 8, 2004

	QIBs	Non-Institutional Investor	Retail Portion
No. of shares	Maximum of 29 m shares	Maximum of 14.5 m shares	Maximum of 14.5 m shares
Maximum % offered from Net public offer	50%	25%	25%
Minimum Bid/Application size	Rs 50,001	Rs 50,001	200 shares
In multiples of	100 shares	100 shares	100 shares
Maximum Bid/Application size	Not exceeding the issue size	Not exceeding the issue size	Not exceeding Rs 50,000

*4,99,990 Shares reserved for permanent employees of the company

The Government of India in the year 1998 issued the Mega Power Policy under which large projects (over 1,000 MW) were proposed to be set-up. Mega power projects (MPPs) were provided various fiscal incentives and the projects were structured to sell power to multiple states at cheaper rates due to economies of scale. Since multiple states were involved, PTC was incorporated on April 16, 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 in the process, selling the same to the state power utilities, licensees, bulk consumers, whether in private and public sector in India and abroad.

The issue will help company to build the long term capital base as the company needs to maintain funds equivalent to one month of its purchase value for the short term and five month purchase reserves for the longer term.

PTC buys power from power plants in a surplus location and sells it to an entity in deficit states. So, skill set is required to identify potential buyers and sellers of power at a particular point of time. The company's marketing department maps the power deficit and power surplus pockets of the country on the continuous basis. The price is negotiated, which is acceptable to both the parties (buyer and the seller). Thereafter, PTC facilitates the physical transfer of power from the seller to the buyer by arranging the transmission lines by contacting various zones. PTC charges a traction margin for the services provided that can be determined either as a fixed amount per kWh (kilowatts per hour) of power traded or as a percentage of cost of power traded. It helps both consumers as well as the producer in the sense that producers can operate at full capacity by entering into power purchase agreement with PTC which in turn also reduces the cost of power produced due to economies of scale for consumers.

PNB Gilts Limited- A primary dealer in Government securities and deals with money market instruments. It is one of the major players in the debt market and net profits for 1HFY02 stands at Rs 456 m. The company came out with a public issue in 2000 at Rs 30 per share and is trading at Rs 18 levels.

Sector

The recent Electricity Act has proposed significant policy decisions that could reform the Indian power sector over the long term. Licensing norms for entering generation and T&D (transmission and distribution) business of power have been eased. Under APDRP (Accelerated Power Development & Reform Program), as a one-time measure, SEB (State Electricity Boards) dues to the central utilities are to be converted into state backed bonds. In exchange, the states have to give an undertaking that SEB will not incur losses and T&D losses will be checked in a time bound manner. Though the generation capacity has increased from mere 1,300 MW at the time independence to around 108,000 MW, supply has failed to meet demand. The gap between supply and demand of power has widened over time, with a reported energy gap of 8.8% and peak demand shortage of 12.2% in FY03.

The government plans to add 150,000 MW of generation capacity over the next decade (including 100,000 MW thermal capacity and 50,000 MW hydro capacity) in order to bridge the current demand-supply gap. This is almost 1.5x current capacity. Also, if India has to achieve a consistent 7% GDP growth, power generation has to grow by 8%-9% per annum. Thus, demand is not an issue in this industry. However, poor health of the SEBs has kept both private and public investments away for some time now. While it is clear that power sector is a sunrise industry in India going forward, the pace of the growth depends largely on power sector reforms.

REASONS TO APPLY

• Sector potential: With the recent string of reforms in the Indian power sector, the sector is expected to grow at a very fast rate. The government has plans to add around 48,000 MW power generation capacity during 10th five-year plan. The fast growing generation capacity will also increase the scope of power trading in the country. Just to put things in perspective, only 2.5% of the power generated in the country are being traded as compared to around 50% in the developed economies.

• First mover advantage: PTC has the first mover advantage in power trading in India. As on date, the company has over 25 customers who are either trading power or have traded power through the company. The company has entered into a number of MOUs (memorandum of understanding) with Mega Power Producers for offtake of power. Currently, the company is targeting captive power plants with surplus power of around 10,000 MW. Consequently, the first mover advantage will give a edge over competitors who are likely to enter over a period of time.

• Nodal agency for cross-border trade: PTC has been appointed as the nodal agency for cross-border trades in power with Nepal and Bhutan. The company expects to have an assured market in terms of power from projects such as Chukha and Kurichhu. In the future, this could mean importing power to India from Bhutan (Tala HEP) and Nepal (West Seti HEP).

REASONS NOT TO APPLY

• Low barriers to entry: The barriers to entry in power trading business are very low. With players like NTPC, Tata Power and Reliance Energy floating power trading companies, competition will be very high going forward, which can impact margins. Also, Tata Power and NTPC combined holds 26% stake currently (21% post issue), which could mean a conflict of interest. Besides, if the company were to lose its key employees, it could have a material impact on the growth prospects over the long term.

• Change in billing cycle: Currently, the company's billing policy is weekly or monthly, which is low. As a result, it enjoys a negative working capital. Going forward, this may change as the sellers also shift to weekly billing. Also, competitors may allow the buyers a longer billing cycle, which can put pressure on PTC to increase its billing cycle.

• Loss due to open positions and default risks: With the company entering into long-term power purchase agreements, any mismatch in the agreed purchase or sale of power have to be made good either in the form of penalty, spot purchase/sale of power. This exposes the company to trading risks. Though company has been able to timely recover money from SEBs till now, we cannot rule out the occurrence of default, looking at the financially distressed condition of SEBs.

FINANCIAL PERFORMANCE

(Rs m)	FY01	FY02	FY03	9mFY04
Income from Operations	114	3,540	9,004	16,999
Service Charges	2	31	33	24
Rebate on power sold	-	75	205	363
Total operating revenues	116	3,496	8,832	16,660
Growth (%)	42.0%	2907.2%	152.6%	88.6%
Other Income	9	25	36	47
Expenditure	123	3,441	8,658	16,320
Operating Profit	-7	56	174	340
Operating Profit Margin (%)	-6.2%	1.6%	2.0%	2.0%
Interest Expenses	-	-	3	7
Depreciation	0	1	7	10
Profit before Tax	1	79	200	370
Tax	0	3	71	123
Miscellaneous expenses written off	2	2	4	3
Profit after Tax/(Loss)	(1)	73	125	244
Net Profit Margin (%)	-0.9%	2.1%	1.4%	1.4%
No. of Shares (m)	91.5	91.5	91.5	91.5
Diluted Earnings per share (Rs)	(0.0)	0.8	1.4	2.7
Key Ratios
RONW	-6.3%	31.7%	15.6%	25.7%
ROCE	-6.3%	31.7%	15.9%	26.4%

**Based on the issue price of Rs 31 per share
*As of September 30, 2001

Funding

N. A.

Shareholding

Category	Pre-Issue	Post-Issue
Power Grid Corporation Ltd	13.1%	8%
NTPC	13.1%	8%
NHPC	13.1%	8%
Power Finance Corporation	13.1%	8%
Tata Power	16.4%	10%
Damodar Valley Corporation	10.9%	7%
Other financial institutions	20.3%	12%
Public (including reservation)	-	39%
Total	100.0%	100%

Valuation comment

The comparative valuation study is not appropriate due to the company's unique business model. However, we believe that the barriers to entry in this business are extremely low and more importantly, it could face competition from power generation companies in the future. As a result, PTC is at a disadvantage. While potential is high, considering the low value-add in the business and the lack of control over the buyer/seller, risks seem to outweigh growth prospects. The P/E ratio at Rs 16 works out to be 4.5x, annualised 9mFY04 earnings.

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Disclaimer:
We would like to inform our readers that this IPO note is just a one-time view on the company and in no way implies that there will be regular coverage on the company's performance or any other development. Should we decide to bring the company under research coverage in the future, it will be available exclusively to subscribers of the respective subscription.