>PTC INDIA: PTC Financial Services to retain only 5% stake in IEX

Tariff hike and policy reforms the key to future growth
The past two quarters have been depressed for PTC India owing to the continuous delay in receiving payment from two state electricity boards (SEBs), Tamil Nadu SEB and Uttar Pradesh SEB. These two SEBs together owe over Rs1,000 crore to PTC India. While the power supply to Tamil Nadu has been completely stopped, Uttar Pradesh is being supplied on a cautious basis. However, the recent petition filed by the Tamil Nadu state utility to hike tariff with effect from April 1, 2012 amid mounting losses could see the enforcement of the tariff hike and would augur well for PTC India. Uttar Pradesh can also see some progress on the tariff hike proposal post- election; however we are not expecting any immediate action now. Also, the commissioning of its first power tolling project, the Simhapuri power plant (150MW), is expected by March end and would boost its trading volumes from FY2013 onwards. Sound policy action on tariff hike and receipt of delayed payments (which would lower its interest cost) along with a surcharge remain the key monitorables for the stock in the near term. We maintain Buy on PTC India with a revised price target of Rs75.


PTC India’s market share remains stable at 33.4% in CY2011
We analysed the CERC data for the short-term (ST) power trading market for CY2011 and found that PTC India’s market share in ST power trading market has remained stable at 33.4% as compared with 33.3% in CY2010. The volumes traded by PTC India in H1CY2011 increased by robust 44% on a year-on-year (Y-o-Y) basis while in H2CY2011, the yearly growth came lower at 24%. This was led by the loss of business from one of its major clients, the Tamil Nadu SEB, on account of the delay in its payment worth Rs750 crore since Q4FY2011. This development also led to a severe liquidity crunch for PTC India as a result of which the latter had to raise debt in H1FY2012.



Rising working capital cycle led by SEB delay
The working capital cycle of the company got further stressed in M9FY2012 as it increased to 86 days from 17 days in FY2011 owing to the continuous delay in receiving payments from the SEBs, mostly Tamil Nadu SEB and Uttar Pradesh SEB, which have been incurring operational

losses. The management has confirmed that about Rs50 crore has been received in Q4FY2012 from Tamil Nadu SEB while a payment of approximately Rs700 crore is still pending.We sense that high receivables are blocking the company’s working capital and lowering the yield on cash. The company has indicated that the dues from the Tamil Nadu SEB would be recovered in one to two months in view of the proposed tariff hike as well as the proposed fund raising plan of an associate company of the Tamil Nadu SEB.



PTC Financial Services to retain only 5% stake in IEX
PTC India Financial Services, one of the promoters of the Indian Energy Exchange (IEX), plans to sell part of its stake in the bourse, retaining a minority 5% stake, in line with regulations. As part of the exit plan, Multiples Alternate Asset Management (MAAM) is said to buy PTC India’s 14.5% stake in IEX. PTC India Financial Services had earlier sold a 5% stake to Bessemer Venture Partners and Lightspeed Venture Partners, the existing partners in the exchange.
We remain positive on its subsidiaries investment where big scope of value unlocking exists.

PTC yet to find partners after Ashmore exit
There are media reports that PTC India is in talks with at least three companies to find new partners. The fund had also started approaching potential investors such as pension funds. In May 2010, PTC India had announced the launch of this infrastructure fund in a joint venture with
Ashmore. PTC Ashmore India Energy Infrastructure Fund, which was to provide equity financing to power projects in a 40:60 ratio, did not take off due to various differences in operational issues. The company had earlier indicated that single investment below Rs100 crore in a power project would happen via PTC India Financial Services and above Rs100 crore via private equity venture. This foray would increase the exposure of PTC India to the power sector and may not be sentimentally good given the current problems faced by the power projects.

Maintain Buy, price target revised to Rs75
PTC India’s traded ST volumes posted a subdued growth in recent months due to the poor financials of the SEBs. However, the overall power traded volumes have been partially supported by the boost in the long-term volume. The commissioning of its first tolling project (the Simhapuri project) and the Karcham Wangtoo project are also likely to boost the volume in the coming quarters. In view of the recent developments in its various projects, we have fine-tuned our volume estimates. Overall, our estimates have been upgraded for FY2012 and FY2013 by 5-10% each. Accordingly, our price target has been

 upgraded to Rs75. The near-term trigger in the stock is the receipt of the payment from SEBs, a reduction in debt and interest costs, and the commissioning of various power projects under power purchase agreements. We are expecting a compounded annual growth rate of 13.4% over FY2011-14. That implies a low PEG ratio of 0.67. The stock is also trading very attractively at 0.7x FY2014E book value. Hence, we maintain our Buy rating on PTC India.






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