PTC India

Fresh investments with a two/three-year horizon can be considered in PTC India, promoted by NHPC, NTPC, PowerGrid and PFC.

The company has transformed from a pure trading company into a integrated power producer with presence across the value chain including funding, generation, fuel intermediation, power tolling, power exchange and advisory.

At current market price of Rs 113, the stock trades at a multiple of 28 times its estimated FY10 earnings. The price to estimated FY10 book value works out to 1.55. The company raised Rs 500 crore through qualified institutional placement last fiscal. Returns may improve as the excess cash is deployed in subsidiaries and integration projects.

PTC India will continue to benefit from higher trading volumes over the next couple of years as demand-supply mismatches in the energy sector persist. Beyond that period, long-term agreements to buy and sell power and new investments made by PTC would aid revenue growth.

Cross-border trading, for which PTC is a nodal agency, too will result in stable trading volumes. PTC has 48 per cent market share in the overall power trading market and a 30 per cent share in the short-term trading market.

In addition to steadily rising volumes (20 per cent CAGR over five years), PTC is likely to receive a boost to its profits from the higher trading margins of 7 paise per unit on power sold at tariffs higher than Rs 3/unit, which took effect in January.

The company has already signed long-term agreements to purchase 35,000 MW. With un-regulated tariffs, these offer better margins.

PTC will also benefit from listing of its subsidiary, PTC Financial Services (PFS), a project financing company that is planning an IPO shortly. This company holds 26 per cent stake in India Energy Exchange and also holds equity investment in other projects.

As of December 2009, PFS had completed total equity funding of Rs. 454 crore and debt of Rs. 795 crore in various projects. By investing in the power exchange, it has shielded itself against competition. It also holds investments in Athena Power, Teesta Urja Power, Barak Power and other projects.

In addition, PTC is also entering such innovative businesses as power tolling, which allows the company to supply fuel to plants and sell the power generated to other users. This obviates the need to commit funds for the power projects.

PTC Energy Services procures fuel and sells it to power projects thereby earning margins. Execution delays in the power projects would be a key risk for the company as it would curtail margins from merchant tariffs. New entrants to power trading too may dent market share, though the market offers sufficient room for expansion.