ICICI Direct: Buy PTC India

PTC promoted by NTPC, Power Grid, PFC and NHPC was formed with the primary objective of trading power, facilitating development of power projects & power market and promoting exchange of power with the neighbouring countries. PTC has enjoyed a leadership position in power trading and currently commands approx. 47% share in the trading market.

A range of services that are being offered by PTC include trading activity, offering advisory services, fuel intermediation and operations of small generation capacities. The company is trying to move up the value chain and plans to be an integrated energy player. The company is focusing on acquisition of stakes in generating assets through its subsidiaries. Going ahead, PTC plans to operate as a private equity player providing all kinds of financing solutions to the power projects. It has placed equity shares through the QIP route twice in the past. In Jan 2008, the company raised Rs 1,200 crore at the price of Rs 155 per share followed by an Rs 500 crore issue in May 2009 at Rs 75 per share.

Investment rationale

Power-Full growth on the horizon for Power trading market Power trading continues to grow in the backdrop of power deficit scenario (which stands at 11.1% for FY09) and the expanding merchant capacities. Power trading has grown at a CAGR (FY02-FY09) of 52% and is expected to cloak a growth of 20% for the next 2 years. The development of energy exchanges, materialization of Long Term Power Purchase Agreements (LTPPA) should accentuate the growth prospects. PTC with the first mover advantage initiated ~11,200 MW of PPA’ which should aid it in reporting a CAGR (FY08-13E) volume growth of 37.7% from 9,889 MU in FY08 to 48,937 MU by FY13E. Unlocking value in PTC Financial Services (PFS) through IPO PFS holds eminent assets like IEX and stakes in 10 other power related projects (under execution at different stages) in its portfolio. In our bull case evaluation, we expect that the stake of PFS will be worth close to Rs 45 per share for PTC. With PTC and other reputed investment banks being the promoters of PFS, we derive comfort in believing that there will be a significant value unlocking through the expected IPO. Power deficit in neighboring countries to provide additional opportunity PTC has managed to increase the cross-border power trade with Nepal as the country is facing severe power shortages since last couple of months. PTC has been supplying power and is rebuilding old transmission capabilities to increase the cross-border trade.

Risks & concerns

Regulatory developments Core business of PTC, that is, power trading, is a regulated business.Any negative development on the regulatory front would impact the prospects of the company. It may be noted that the regulator had capped the margin at 4 paisa per unit two years ago. According to recent policy initiatives, PTC is not entitled to charge more than 4 paisa per unit of volume on the cross-border power trades. This will reduce the pricing flexibility available to PTC for negotiating fresh contracts.

Dilution of equity expected in near future Fresh dilution planned by the company is a significant concern. PTC is already sitting on huge liquid investments in its book to the tune of ~ Rs 1,000 crore. Part of the liquidity is committed for future projects which is already hampering their return ratios. The plan for fresh dilution will impact the return ratios even further in the short run.

Valuations

At the current market price of Rs 89, the stock is trading at P/BV of 1.3x in FY09. With stakes in several big-ticket power ventures, PTC is likely to add further muscle to its existing position. Thus’ we are recommending PTC as ‘Pick of the Week’ with potential upside of 10% within 3-6 months.

Technical Outlook

The Stock is forming rising peaks and troughs on the weekly charts which define an up trend. The stock has been consolidating for past seven weeks and likely to gather positive momentum once sustains above 90 levels. It is also forming ‘Triangular’ pattern on the daily charts, breakout from which is likely above 93. We place the short term target of 97 and 101 on the stock with stop loss at 83 Earlier, the Stock has corrected from its Jan’08 highs of 201 and made a good base around 50 levels. Then from mid February’09 it started its uptrend accompanied by rising volumes.

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