Stock Pick From The Power Sector

Here Is Why:

• Pickup in economic activity to boost its trading business
• Trading at 30 per cent discounts to its valued arrive on SOTP basis
• Consistent dividend paying company with dividend yield of  three per cent at CMP

Power sector was one of the worst hit sectors as the India growth story started to falter and reached to a decade low. Nonetheless, as the economy is turning the corner and more clarity is emerging in regulatory front and environmental clearances given to various projects, this sector is expected to be again in limelight. Besides power companies, one of the companies that is going to reap the benefit of such improvement in the situation is PTC India (PTC), the largest power trading company in India. What also make the company’s shares a strong buy are attractive valuation at which it is available and the consistent dividend payment history of ten years. The current dividend yield comes at around three per cent. 

PTC is primarily into short term to long term trading of power generated from large power projects as well as short term trading arising as a result of supply and demand mismatches. The company has also been authorized by the Government of India to trade electricity with Bhutan and Nepal. Beside this PTC has two subsidiaries namely PTC India Financial Services (60 per cent) and PTC Energy (100 per cent) that are engaged into providing financial services to companies in the energy value chain while latter is in the business of jointly developing power projects as a promoter. 

On consolidated basis for the five year ending FY13, topline and bottomline of PTC has increased by a CAGR of 19 per cent and 39 per cent respectively and was at Rs 9168 crore and Rs 242 crores for FY13 . This was primarily helped by rise in power trading that has increased by CAGR of 24 per cent in the same period and was at 28.6 billion units for FY13. Going forward as economy picks up and hence the demand for power we expect the trading business to grow at 17 per cent CAGR in next three years. Currently PTC has in their pipeline power purchasing agreements of around 3.5 GW that will help it to achieve those targets. 

Company like this are valued on sum of the parts (SOTP) basis. We valued the core business of PTC on four times of trailing twelve month earnings per share, which come at Rs 29.64 per share. Investment in its two subsidiaries PTC India Financial Service and PTC Energy is valued at 25 per cent discount to market price and book value respectively, combined value of which comes to around Rs 12.75 per share. Its unquoted investment in various projects is again discounted at 25 per cent to its book value and is at Rs 22 per share. Finally company is currently sitting on cash pile of around Rs 781 crore at the end of December 31, 2013 that comes at Rs 26 per share. The final value per share that we arrive at is Rs 79 per share. Therefore, we advice our readers to take exposure to the counter as we believe in next 12-18 months PTC’s share will achieve its target price.