Re: {LONGTERMINVESTORS} PTC - Thread
Rajesh Desai
PTC India - SHAREKHAN
Recommendation: Buy
Price target: Rs58
Current market price: Rs47
PFS business on track; adding value to PTC
We recently met the director (Finance) and chief financial officer of PTC India Financial Services (PFS), a subsidiary of PTC India (which holds a 60% stake) to discuss the key growth triggers for the company and the challenges faced by it. We found the management to be very positive about the company's growth prospects with a robust loan asset growth trajectory and nil non-performing assets (NPAs). The key takeaways from the meeting are presented below.
Key takeaways from the meet
Loan book to double in FY2014, backed by healthy sanction pipeline: Currently, PFS has a pipeline of Rs10,500 crore of sanctioned loans and Rs2,700 crore of loan assets. Based on this, the management expects the loan book to double (over the last year) in FY2014 and grow at a significant rate in FY2015 (on a year-on-year basis) too, due to a low base. We learned from the management that the loan book could experience significant growth traction, thanks to the renewable energy projects. The company has enhanced its focus on renewable energy recently in view of the uncertainty around thermal projects. Moreover, renewable energy projects carry relatively lower execution risk and have a significantly lower gestation period. Out of the total loan assets around 40% is in the renewable energy space (mainly in the wind energy segment, which accounts for about 90% of the renewable loan book). The company believes that in the next two years, the loan book is likely to grow mainly because of sanctioning of more loans for renewable energy projects.
Healthy interest spread but could witness margin pressure: During Q1FY2014, the blended yield on the loan assets was at about 13% while the cost of fund was 8.5%. Hence, the company had a very healthy interest spread of 4.6% during Q1FY2014. However, this was lower on both Y-o-Y and quarter-on-quarter (Q-o-Q) bases as a function of both a lower yield and rising cost of funds. The yield on the loan assets came down from 14.3% in Q1FY2013 and 13.9% in Q4FY2013 to 13.07% in Q1FY2014, as the share of the short-term loans (which generate higher yields compared with the long-term loans) in the total loan asset book came down from 30-35% in FY2012 to 20-25% in FY2013. Currently, the blended cost of fund is around 8.5% for PFS. The majority (65%) of the total funds is from the domestic banks and the remaining from external commercial borrowings (ECBs), bonds and debentures.
We believe the yields could come down marginally going forward, given the changing composition of the short-term and long-term loans. We also expect the cost of fund to go up from the current level due to a revision in the base rates and higher hedging cost, given the volatility in exchange rates in recent times. We learned that the incremental cost of borrowing is about 10.5%. Hence, we opine that overall there could be some compression in the spreads in FY2014 compared with FY2013.
As the company is having some foreign loans (ECBs) on its books, we believe there could be a foreign exchange loss of around Rs3-4 crore in the coming quarter, given the dollar's movement.-
View: remains a significant contributor to PTC India group: PFS is not under our active coverage. However, our coverage company PTC India holds a 60% stake in PFS. During FY2013, PFS contributed around 33% to the bottom line of the consolidated company, PTC India, and the contribution is likely to inch up in the coming two years, given the significant ramp-up in the PFS's loan book which should translate into earnings. Hence, we believe PFS could be one of the major drivers of PTC India's earnings growth. Based on the sum-of-the-parts (SOTP) valuation methodology, PFS contributes around 25% of our price target for PTC India. PTC India is trading attractively at 0.5x its FY2014 and FY2015 book value estimates. Hence, we retain our Buy rating on the stock with a price target of Rs58 (SOTP based).
CA. Rajesh Desai
Rajesh Desai
STOCK UPDATE - Sharekhan
PTC India
Recommendation: Buy
Price target: Rs65
Current market price: Rs55
Igniting positive triggers; price target revised up to Rs65
Key points
Received long pending receivables from Uttar Pradesh SEB; reading through positive signals:The balance sheet of PTC India was adversely impacted for the past two years due to significant receivables pending from the state electricity boards (SEBs) of Uttar Pradesh and Tamil Nadu. Till Q1FY2014 the Outstanding receivables from both Uttar Pradesh and Tamil Nadu SEBs together were more than Rs1,000 crore. Recently, PTC India received its long pending principal due from Uttar Pradesh SEB worth Rs778 crore. From the received amount, more than Rs200 crore would be paid by PTC India to the power suppliers. Hence, on a net basis, it would receive above Rs500 crore. We expect a positive development on the pending receivables of around Rs300 crore from the SEB of Tamil Nadu soon. On this back drop, where these two sticky receivable accounts were hangover for the company for some time, impacting its returns ratio and valuations, the positive development could trigger a re-rating in the stock.
Election year could boost power trading volumes in the near term, plus volume boost expected from commissioning of new plants over next one to two years: Generally during the election period, the SEBs tend to reduce or avoid load shedding and consequently the power trading volume picks up. We expect a similar trend in the coming quarters especially since many SEBs have returned to health after the tariff hikes and financial restructuring.
Decent Q2 performance of financial service subsidiary, PFS: During Q2FY2014, PTC Financial Services (PFS) managed a healthy interest spread of 4.9%, which is a decline of 111 basis points year on year (YoY) but an increase of 27 basis points quarter on quarter (QoQ). It witnessed significant growth (66% YoY and 36% QoQ) in the loan disbursement to Rs550 crore. Consequently, the net interest income (NII) of PFS registered a growth of 30% YoY and 16% QoQ to Rs50 crore in Q2FY2014. While the loan asset and healthy yield helped for a better top line, a significant jump in the operating cost along with higher cost of funds limited the growth in earnings. On the asset quality front, it has nil net non-performing assets (NPA) as on September 2013.
Disruption in Andhra Pradesh could hit volume adversely in Q3: On the negative side, the ongoing agitation-led disruption in the power generation and supply in Andhra Pradesh could impact the power trading volumes. Andhra Pradesh accounts for close to 10-12% of total trading volumes for PTC India.
Valuation-concerns easing out; re-rating on cards: PTC India witnessed a sharp de-rating in its valuation multiple due to issues surrounding the power sector and the built up of receivables from the SEBs (that have sucked out all the free cash from its books). However, we expect the improving receivable position and the near-term boost in the power trading volumes (in line with the historic trend in an election year) to significantly improve its financial performance and also lead to re-rating of its multiples. Moreover, the long-term growth outlook is also healthy given the expectations of close to 15% compounded annual growth in its trading volumes over the next three years (driven by commissioning of new power plants and supply from two power plants where its power purchase agreement was under dispute). Consequently, we retain our Buy rating on the stock with a revised price target of Rs65.
CA. Rajesh Desai