[T.S.R:14728] BUY PTC

 

 

CAS RESEARCH DESK • EDELSTAR • FUNDAMENTAL RESEARCH

28th June 2010

PTC INDIA LIMITED Current Price: Rs. 100.5 Target Price: Rs. 115   Buy BUSINESS OVERVIEW PTC India Limited (PTCIND) was established in 1999 to develop a competitive market for electricity trading and also to take on the credit risk, thus facilitating private investment in power development. Although started as a standalone with virtual monopoly in the market up to FY04, the company started losing market share from 70% in FY05 to 44% in FY07, before recovering ground in FY08. PTC currently enjoys ~50% market share. As the market dynamics improved and volumes grew, the need for standalone trading entities also started to decline. This is because most power producers started floating their own trading arms, leading to increased competition and lesser tradable surplus available to PTC. The company realised this risk early on and, hence, began diversifying into being an integrated entity with entry into coal trading and power project development and financing. INVESTMENT THEME India is projected to have power generation capacity of ~750 GW by 2030, ~5x the current capacity, which is expected to be the third highest globally. The macro story of the power sector implies high growth, long-term visibility and sustainable returns. This, together with the demand-supply gap (~16% peak deficit), has been positive and attracting investments into the power sector, which represents huge opportunity for PTCIND.   PTC India's (PTCIND) current 18 bn kWh power trading volume is expected to catapult 150% by FY13E and triple by FY15E to 57 bn kWh. This growth is expected solely from long-term PPA-based trades, where margins are higher. We have excluded all disputed and doubtful PPA projects from our growth assumptions, while factoring in six-eight months' delays in others. Of the 12 GW projects in the pipeline, we have assumed only 7.5 GW commissioned by FY14. This ensures PAT of Rs. 2.67 bn in FY13E (233% growth over FY10).   PTCIND has diversified into power generation, tolling, project financing, and coal trading for captive power capacities, which will garner further volumes. Its project financing arm (PFS) has facilitated the tying up of 12 GW of PPA capacities, providing maximum impetus to earnings by FY12-13. The power tolling arrangement for 360 MW is a lucrative option for earning margins as high as 60-80paise /kWh, adding Rs. 1-1.5 bn to annual earnings by FY13E.   The Central Electricity Regulatory Commission (CERC) has abolished margin cap on long-term trades and raised it on short-term trades to 7 paise/kWh from 4 paise. This will boost PTCIND's margins substantially from FY11, especially as long term trading volumes rise (which have virtually no limit on margins).   PTCIND currently earns only 46% of its FY10 EBIT (Rs. 1.3 bn) from core trading operations, while the balance is from treasury income on liquid assets of Rs. 10 bn. (i.e. Rs. 34 per share). We expect this mix to shift radically with the core trading business contributing 90% to EBIT by FY14. Moreover, volume growth and higher margins will deliver an overall EBIT CAGR of 38% (FY10-14). INVESTMENT RISKS PTCIND has faced its share of troubles with LANCO, Torrent Power, and recently JP Power Ventures (erstwhile JP Hydro for the Karcham Wangtoo project). These parties have all dishonored their respective PPAs with the company on various legal counts. However, most of these issues are now sub judice, with the Supreme Court encouraging an amicable solution through arbitration in most cases.   For the tolling projects that PTC has entered into, it has not signed any fuel supply agreement yet. Since the company is negotiating for a seven-year contract, it intends to acquire a coal mine abroad to sustain supply for the PPA term of 25 years. Since PTC has committed Rs. 1.25 / kWh payment for 50% of the power offtake, it has to ensure the margin differential (between the electricity rate and fuel price) to sustain earnings.   CERC had capped trading margins at 4 paise/kWh in early 2006, reducing traders' earnings potential substantially. However, in its recent notification, the regulator has raised the cap on short-term margins to 7 paise, with no cap on long-term margins. While CERC's current stance appears to be pro free-markets, its reversal in future could risk earnings. OUTLOOK AND VALUATIONS We value PTCIND based on SOTP of its trading, tolling, financing segments, and cash on books. The cash on books stands at Rs. 10 bn, contributing Rs. 34/share. We have not accorded any additional value of the stake in Athena Energy, coal mines, and the proposed power fund, since further clarity is awaited. One paise increase in long-term margins raises the SOTP value by Rs. 8 /share (~6%). Assuming six eight month's delay in projects and excluding disputed capacities, PTCIND's CAGR is likely to be 80% at the EBITDA level over FY11-14E. On our FY11E and FY12E estimates, the stock currently is trading at a EV/EBITDA of 12.7x and P/BV of 1.4x on FY11E basis and at a EV/EBITDA of 11.9x and P/BV of 1.3x on FY12E basis.

To BUY PTC INDIA LTD, • Trade online at www.edelweiss.in • Call your equity advisor or • Call 1800-102-3335 (toll-free) • E-mail: helpdesk@edelweiss.in Not a customer? Open an account with us! EdelStar - Product Note Read Now! EdelStar - Performance Report Read Now!         QUICK DATA Face Value (Rs) 10.0 Div. Yield (%) 1.2 No of shares ('mn) 294.5 52-week High/Low (Rs) 125 / 81 NSE Symbol PTC BSE Code 532524 Edel Code PTCIND Market cap (Rs. bn.) 29.8 SHAREHOLDING PATTERN (%) Promoters 16.3 MFs, FIs & Banks 50.0 FIIs 18.7 Others 15.0   EDELWEISS CLASSIFICATION Market Cap Mid Cap Liquidity High Relative Reco Sector Outperformer Relative Risk Low Sector Rating Power –Underweight   GROWTH METRICS (%) Year to Mar FY11E FY12E FY13E Revenues 18.4 (7.8) 42.4 EBITDA 46.1 (2.5) 341.3 PBT 12.4 (4.0) 199.8 Net Profit 15.7 (4.0) 199.8 EPS 15.7 (4.0) 199.8

EDELWEISS RATIOS - COMPARATIVE VALUATIONS

Company PTC India Ltd KSK Energy Ventures Ltd Reliance Infrastructure Ltd Torrent Power Ltd Jaiprakash Power Ventures Ltd JSW Energy Ltd 1 Wk Price performance (%) (1.4) 3.9 (3.0) 0.6 3.3 (1.1) 3 M Price performance (%) (7.2) (4.9) 13.6 12.7 5 13.3 PE (x) 36.3 36 18.7 19.2 60.8 29.5 Price to Book Value (x) 1.5 2.4 1.5 4.1 4.4 4.4 EV to EBITDA (x) 15 22.1 18.1 23.1 53.5 21.8 Debt to Equity Ratio (x) 0 1.2 0.1 1.1 0.9 2.2 Click here for more Edelweiss ratios and screening tools

FINANCIAL SNAPSHOT

Year to March FY09 FY10 FY11E FY12E FY13E Income from operations 63,585 77,585 91,868 84,705 120,589 Total operating expenses 63,360 77,062 91,104 83,922 117,133 EBITDA 225 523 764 783 3,457 Depreciation and amortisation 62 55 54 56 57 EBIT 163 468 710 728 3,400 Interest expenses - 4 - - - Other income 961 715 615 545 417 Profit before tax 1,123 1,179 1,326 1,273 3,817 Provision for tax 226 377 398 382 1,145 Core profit 897 802 928 891 2,672 Extraordinary items 11 138 - - 2 Profit after minority interest 908 941 928 891 2,674 EPS (Rs.) fully diluted 2.0 3.2 3.2 3.0 9.1 Diluted P/E (x) 50.3 31.4 31.4 33.5 11 Book Value (Rs.) 68 71 73 75 80 P/BV (x) 1.5 1.4 1.4 1.3 1.3 EV / EBITDA (x) 40.8 19.5 12.7 11.9 2.3 Click here to view the detailed financial snapshot of PTCIND.

TECHNICAL VIEW

PTC India Ltd has multiple supports at Rs. 98 on its daily and weekly chart. Stock has been trading in very narrow range of Rs. 98 – 106 since last 2 months. Breach of trading range on either side will lead to rally in stock. Do your own Research! Click here for more technical charting options for PTCIND.

Disclosure:

--