>PTC INDIA

Recommendation: Buy (SHAREKHAN)
Price target: Rs71
Current market price: Rs60

Price target revised to Rs71

Result highlights

• Q1FY2013 results affected by lower rebate income: PTC India's Q1FY2013 results were significantly below expectations led by a fall in the rebate and treasury incomes. The company started selling power under power tolling agreements during this quarter and made an operating profit of Rs12.5 crore (approximately Re1/unit). Its management indicated that the sustainability of the profit of the power tolling business could be determined only after some time as the business is currently at a very nascent stage. The payment from the Tamil Nadu State Electricity Board (SEB) has started coming in. The company has already received over Rs175 crore from the SEB and expects to receive the balance (Rs450 crore) by the end of CY2012. However, the company is yet to receive the timeline for the payment due (over Rs450 crore) from the Uttar Pradesh SEB. 
• Top line fell by 20%: The top line of the company fell by 20% year on year (YoY) driven by a 18% year-on-year (Y-o-Y) fall in the realisation/unit while the trading volumes were in line with our expectation. The number of power units sold under the long-term contracts was stable at around 1 billion units on a yearly basis. The company started selling power under power tolling agreements (for the Simhapuri power project of 200MW) in this quarter and sold ~121.7
  million units. 
• Fall in rebate and treasury incomes mars profitability: The operating profit margin (OPM) fell to 1.6% from 1.9% in Q1FY2012. This was mainly due to a drop in the rebate income, which declined to Rs2.2 crore in the quarter from Rs23.4 crore in Q1FY2012. The overall operating profit fell by 33% on a yearly basis. The core trading margin (excluding the surcharges and rebates) dropped to 4 paise/unit from 4.7 paise/unit in Q4FY2012 owing to increased competition in the short-term trading market. The company is estimated to have earned a profit of Re1/unit on the power sold under the tolling agreements. It charges a 2% rebate on the payment in case of early payment while it charges a surcharge @ 15% per annum on delayed payments. 
• Net profit dropped by 49%: The other income decreased by 88% YoY led by a fall in the investments-the treasury income declined to Rs1.6 crore in Q1FY2013 as against Rs17.3 crore in the corresponding quarter of the last year. The positive surprise was the fall in the interest cost (became almost nil) as the debt level was maintained at zero throughout the quarter. Further, led by a higher tax rate, the profit after tax (PAT) fell by 49% to Rs22.9 crore, which is lower than our expectation of Rs40 crore. 
• Receivables remain high at Rs2,700 crore: For the quarter, the net cumulative receivables from the Tamil Nadu and Uttar Pradesh SEBs remained high at Rs930 crore with only Rs100 crore of payment received. The total receivables further increased from Rs2,581 crore in Q4FY2012. However, the company is sitting on a surcharge of over Rs150 crore on account a delay in receiving payments from the SEBs; this would boost the future profitability as and when the dues are received.
• Estimates downgraded by 10%: We have further downgraded our estimates for FY2013 and FY2014 by 10% each in view of the impending competitive margin pressure, the falling short-term trading volumes and the other income assumption. We expect the profit from the core trading business to post a compounded annual growth rate of 14.1% over FY2012-14. PTC India Financial Services (PFS) has reported a strong performance for the quarter (with its PAT up 124% on a yearly basis) led by a rise in its interest income from loan financing during the quarter. One of its power tolling projects aggregating 200MW was commissioned in early FY2013 and boosted its revenue and profitability during the quarter. 
• Price target revised to Rs71: We expect the overall power traded volumes to significantly increase on the back of the long-term power purchase agreements (PPAs) in the next two years when the undersigned power projects would start commercial operation. However, the recovery of payments from the SEBs and an improvement in the execution of power projects have become essential for keeping PTC India's growth story intact. We have increased our target valuation multiple of PTC Energy to 2x its FY2012 book value (from 1 x earlier) as the revenue from it's first power tolling projects started flowing in from Q1FY2013. However, on account of our downgraded estimates for the core power trading business, our sum-of-the-parts (SOTP) based price target has been revised downwards to Rs71. As the stock's current valuation still looks attractive at 0.7x FY2014 estimated book value, we maintain our Buy rating on PTC India.

RISH TRADER