Stock Pick From The Power Sector

The company recommended as the Low Priced Scrip for this issue is from the power sector. It is a small company that has shown a remarkable turnaround from financial difficulties to report profits this year and trade at a discount to its larger peers.

Here is Why

• The company is receiving its pending dues from state electricity boards and expects recovery of full receivables by end of FY2013.
• The management expects a larger chunk of the revenue to come in from long trades, which in turn will boost the company’s financial performance.
• The two major projects of Simhapuri Energy and Meenakshi Energy are expected to help the company going ahead. 

The scenario for the power sector as a whole has not been good for quite some time now. But with the government now looking at reforms rather seriously, we are sure that it is just a matter of time before the tide turns in favour of companies operating in this sector as well.

It is with this in mind that we are recommending PTC India as a low priced scrip worth investing in. We believe that the company would be performing better going ahead. One may see a decent growth from its tolling business, which has already commenced operations. Also, the management expects a larger chunk of revenues to come in from long trades, which in turn will boost its financial performance. Further, recent announcements by the government about debt restructuring of troubled state electricity boards (SEBs) would improve the financial position of SEBs and thereby equip them to buy more power. This will help the company, as its trading volumes will go up, resulting in better realisations. Besides, we also expect the company to recover some of its pending dues from SEBs, which would strengthen its balance sheet.

PTC India is a frontrunner in the power trading market in India. The company has maintained its leadership position and currently has a market share of around 43 per cent. PTC India also has two subsidiaries, PTC Energy, which is wholly owned, and PTC India Financial Services, a listed entity with a market cap of around Rs 850 crore, in which it holds a 60 per cent share.

The recent June quarter numbers for the company were not that good, as it faced various headwinds. Its standalone revenue decreased by 20 per cent to Rs 1987 crore, while the operating profit declined by 34 per cent to Rs 31 crore. However, if we exclude the rebate and surcharge on the same, the profit stands at 28.38 crore against Rs 22.29 crore in the same period last year.

Electricity sold for June quarter of 2013 was marginally lower by 2.38 per cent at 6566 million units (MUs) on a YoY basis. This was primarily on account of the short-term trades, which comprised almost 69 per cent of the total trade. However, from the end of the current fiscal, the management expects a larger contribution from the long-term trades, which will lift the margins higher.

The two major projects of Simhapuri Energy and Meenakshi Energy are expected to help the company going ahead. Of the 300 MW tolling project of Simhapuri, Unit I of 200 MW was fully commissioned in June 2012, while the remaining is under stabilisation. This, coupled with the Meenkashi Energy project of approximately 200 MW, would be sold through PTC. This would result in better volumes and would contribute significantly to the bottomline going ahead.

Earlier the company had around Rs 1000 crore outstanding from SEBs, which was a big concern. The same is currently down to around Rs 500 crore, and the management expects to recover this balance by March 2013.

The other key point for company is that it is debt free. The dividend yield of the stock is also around 2.2 per cent which is very good. Another factor that goes in favour of the company is the recent hike in power tariffs. The stock is currently available at a trailing PE multiple of around 20 times which can be considered as decent enough. We believe one could invest in the scrip keeping in mind a long term horizon.