PTC India Financial Services IPO Analysis

PTC India Financial Services (PIFSL) is a non-banking financial institution promoted by PTC India to make principal investments in, and provide financing solutions for, companies with projects across the energy value chain. It provides both equity and debt financing, including short-term and long-term debt, as well as structured debt financing. With a focus on infrastructure development, it offers an integrated suite of services including provision financing to, and make investments in, private sector Indian companies in the power sector, including for power generation, equipment supply and fuel source projects. It is currently focused primarily on power generation projects in India. It also provides fee-based syndication and advisory services as well as carbon credit financing against certified emissions reduction (CER).



PIFSL is regulated by the Reserve Bank of India as a systemically important non-deposit taking, non-banking financial company (NBFC), and have recently been classified by the RBI as an Infrastructure Finance Company, or IFC. The IFC status enhances its ability to raise funds on a cost-competitive basis and enables it to assume higher debt exposure in infrastructure projects.

PIFSL is a subsidiary of and promoted by PTC, which is the market leader for power trading solutions in India. PTC purchases power primarily for sale to power utilities and also provides comprehensive solutions for the power sector in India. As of December 31, 2010, PTC had a portfolio of power purchase agreements aggregating to approximately 14,185 MW and memoranda of understandings for an additional approximately 13,243 MW. PTC is a GoI initiated public-private partnership promoted by National Thermal Power Corporation (NTPC), Power Grid Corporation of India (Power Grid), Power Finance Corporation Limited (PFC) and NHPC (NHPC). PIFSL benefits from the power sector expertise, network and relationships of PTC and its affiliates, which provide it with early access to business opportunities.

PTC currently holds 77.60% of equity share capital in PIFSL. GS Strategic Investments (an affiliate of The Goldman Sachs Group, Inc.) and Macquarie India Holdings (an affiliate of The Macquarie Group) each hold 11.20% of our equity share capital.

PIFSL makes strategic equity investments in companies in the energy value chain in India, including in green-field and brown-field projects. As of December 31, 2010, PIFSL Board had approved equity commitments for ten companies for an aggregate amount of Rs 564.17 crore, with projects aggregating 3221.45 MW of power generation capacity. Of these equity commitments, as of December 31, 2010, it had entered into definitive agreements for investments in eight companies for an aggregate amount of Rs 482.77 crore, with projects aggregating 2,621.45 MW of power generation capacity.

The company also provides fund based and non-fund based debt financing, including short-term and long-term debt, as well as structured debt financing. In addition to financing project companies, it also provides bridge financing to promoters of power projects. As of December 31, 2010, PIFSL Board had approved debt commitments aggregating Rs 2256.73 crore to 31 companies, with projects aggregating 8972.2 MW of power generation capacity. Of these approved debt commitments, as of December 31, 2010, it had entered into definitive agreements for financing arrangements for an aggregate amount of Rs 1119.87 crore to 17 companies, with power projects aggregating 8,283 MW of power generation capacity. As of December 31, 2010, it had outstanding loan financing of Rs 595.11crore to 13 companies with projects representing 6794 MW of aggregate power generation capacity. As of December 31, 2010, it did not have any non-performing assets in its outstanding loan portfolio.

The company also provides various fee-based services including facility agent and security agent services, as well as advisory services such as techno-economic feasibility studies for power projects in India. In addition, in March 2010 it commenced carbon credit financing, which involves purchase of future CERs from power project developers for sale to third parties.

Its primary sources of funds include equity, term loans and non-convertible debentures (NCDs) issued by it. As of December 31, 2010, it had Rs 200 crore in outstanding NCDs and Rs 322.03 crore in other borrowings. In October 2010, it had also entered into ECB agreement with Deutsche Investitions for an aggregate amount of USD 26.00 million for on-lending to renewable energy projects.

PIFSL capital adequacy ratios were 97.90%, 275.36%, 88.30% and 60.57% as of March 31, 2008, 2009 and 2010, and December 31, 2010, respectively against requirement of 15.0% prescribed by the RBI.

The company is coming with an IPO to raise around Rs 439 crore at the upper band of Rs 28 per share (Rs 357 crore from fresh issue) and Rs 407 crore at the lower band of Rs 26 per share (Rs 332 crore from fresh issue) consisting of a fresh issue of 12.75 crore equity shares and an offer for sale of 2.92 crore equity shares by Macquarie India Holdings. Post issue PTC India holding will fall to 60% from 77.6% while GS strategic investment holding will fall to 8.66% from 11.2% and Macquarie India holdings share would fall to 3.46% from 11.2%.

The company intends to utilize the net proceeds to augment its capital base to meet its future capital requirements arising out of growth in the business and to achieve the benefits of listing on the stock exchanges.

Strengths

The total fund requirement for generation, transmission and distribution projects, during the 12th plan period (2012-17) is estimated at approximately Rs 495083 crore, Rs 240000 crore and Rs 371000 crore respectively.

PIFSL benefits from the power sector expertise, network and relationships of PTC and its affiliates, which provide it with early access to business opportunities.

The IFC status enhances its ability to raise funds on a cost-competitive basis and enables it to assume higher debt exposure in infrastructure projects.

As on December 31, 2010, the company did not have any non-performing assets.

The company has different products and services, viz, equity investments, debt financing, advisory services and carbon credit financing to offer to its clients compared to other players offering only long term debt financing.

Weaknesses

The company has a small balance sheet size, restricting its ability to finance large-scale projects.

Infrastructure investments, particularly investments in power generation projects, are generally less liquid and involve a longer holding period.

Valuation

PTC India Financial Services annualized EPS for 9M FY 2011 on post-issue equity works out to Rs 0.7. At the price band of Rs 26 to Rs 28 (without considering discount of Re 1 to retail Investors) P/E works out to 35.1 to 37.8 times. Considering discount of Rs 1 to retail investors P/E works out at 33.8-36.5.

Pre-issue Book Value is Rs 15.29. P/BV at lower band of Rs 26 works out to Rs 1.7 while at higher band of Rs 28 works out to Rs 1.8.

Post-issue Book Value comes out to Rs 17.6 and Rs 18.1 at issue price of Rs 26 and Rs 28, respectively (considering discount of Re 1 to retail investor for 35% of issue size). P/BV at both the bands works out to be 1.47 and 1.55 times, respectively.

As the company is engaged in equity investment as well financing solutions for the power companies it does not have any peer group in the listed companies in India. However, other companies operating in power financing are PFC (Power Finance Corporation) and REC (Rural Electrification Corporation), whose balance sheet size is much larger than the PTC India Financial Services and has much longer operating history. P/BV for PFC is 1.9 while for REC is 1.8.