PTC

Investment with a long-term horizon can be considered in the stock of Power Trading Corporation of India. PTC is India’s largest power trading company promoted by PSU majors NHPC, NTPC, PowerGrid and Power Finance Corporation; it has a 46.5 per cent share of traded electricity volumes.

The Electricity Act defines power trading as “Purchase of electricity for resale thereof”, which means the company facilitates flow of power from surplus generators to electricity deficit customers.
Early mover

An early mover in power trading, PTC has built a presence across the entire energy value chain, which includes advisory services, investments in power projects, power tolling and fuel intermediation. At the current price of Rs 87, the company trades at a trailing price earnings multiple of 20.

The chronic shortage of power has led to higher peak and energy deficits in recent times, prompting many merchant power and captive capacities, with higher return on equity, to be commissioned. This is likely to increase the trading volumes and offers immense scope for companies involved in power trading.

PTC’s nodal agency status for cross-border trading may also add to its trading volumes. Sums raised through Qualified Institutional Placement (QIPs) are likely to be deployed in acquiring equity stakes in captive and merchant power projects in the private sector, which will also aid volumes.

PTC has already signed around 37,133 MW of power purchase agreements/MoUs with various power generators for the long-term. PTC has also signed 5,990 MW power supply agreement/MoUs. PTC’s increasing focus on long-term trades reduces the seasonality factor inherent to short-term agreements. A presence across the entire energy value chain may also lift overall margins, which are thin in power trading.

At present, short-term trades contribute 52 per cent of the company’s power trading volumes and 80 per cent of the value. The CERC (Central Electricity Regulatory Commission) norms cap trading margins on this segment at 4 paise/unit; only the rest of the volumes came from medium- and long-term trades, where margins are unrestricted.

In this respect, entry by a host of new players into the power trading business could affect PTC’s short term trading volumes. It needs to be noted that the market share of PTC has already fallen from around 70 per cent in FY’06 to 47 per cent in FY’09.

Apart from energy exchanges such as IEX and Power Exchange of India, as many as 43 other players, mainly from power generation and distribution, have also bagged trading licences to enter power trading.

Power generators, such as Tata Power, Reliance Energy, have opened their own trading arms mainly to deal in the power produced by the parent companies. However, PTC’s attempts to step up volumes through long term power purchase agreements, is expected to be a mitigating factor.

If the regulatory change of removing the cap on trading margins comes through, it could trigger much better margins and earnings. This may give scope for unrestricted margins and bring in sustainable revenues. Cross-border trades for which PTC is a nodal agency, are expected to increase as more projects come up in Bhutan and Nepal. Apart from trading, the company’s forays into other related businesses also have the potential to prop up revenues and margins. The company has made an entry into fuel intermediation (procuring fuel and selling it to thermal projects) and recently signed an agreement with power projects in AP for power tolling.

Power tolling is a new business where the company supplies fuel to a power plant and sells the resultant power to other users. The company has raised around Rs 1,700 crore through QIPs in the last two financial years, helping it to invest in subsidiaries such as PTC India Financial Services and PTC India Energy. The company also plans to acquire coal mines in Indonesia which will help in supporting its fuel intermediation and power tolling businesses.
Financials

PTC India’s sales grew at 28 per cent annualised during 2006-09 driven mainly by an increase in trading volumes. The sales momentum is expected to pick up as trading volumes get a boost from new merchant power and captive projects (India has 19,509 MW of captive capacity and more than 7,000 MW is expected to come up by 2012). Increased popularity of the open access system and strengthening of the national grid will also help improve the volumes.

Thanks to strong sales growth, profit grew by 31 per cent compounded annually during the period 2006-09. For the quarter ended June 2009, net sales grew by 97 per cent, thanks to 56 per cent increase in the trading volumes owing to better realisations on long-term contracts and gaining new clients. Due to a rise in employee costs, profits lagged topline growth with a 76.8 per cent growth.

Apart from investments routed through subsidiaries, which include stake in India’s first energy exchange (IEX), it also holds part-stake in Athena Energy Venture, Teesta Urja and Barak Power (JV with BHEL). These investments will support its trading volumes. PTC plans to unlock value in its subsidiary, PTC India Financial Services, by listing it.
Risks

Delays in power projects due to various reasons are a key risk, in the light of long-term contracts PTC has signed with the generating company. Specialised energy exchanges such as Power Exchange of India, IEX (in which PTC has a stake) pose a competitive threat to PTC.

via BL