PTC to benefit from its high growth, low risk model

Growth in power trading volumes due to capacity addition will benefit the Power Trading Corporation (PTC). The monetisation of its investments in the second half of 2011 will further unlock value. In the past two years, PTC's trading volumes have grown from 10,000 million units to 24,500 million units at a compounded annual growth rate (CAGR) of 35%. This has helped PTC's topline to grow at a CAGR of 33% to Rs 9,063 crore in FY11.

Further, its operating margins have also improved by 70 basis points to 2.5%, aided by the change in trading margins as per CERC regulations last year. As a result, the company's earnings grew by 50% in the past one year to Rs 140 crore.

For short-term trades, the margin is fixed at maximum 0.07 for electricity traded at higher than 3 per unit and 0.04 for electricity traded at lower than 3 per unit. For long-term trades, there is no margin cap as they are generally traded at a lower price than short-term trades. For PTC, long-term trade accounted for only 5% in FY11, which mainly is linked to its 2,100 MW projects. By FY13, the company will be adding another 6,000 MW, which will increase the volume. Given this, plus the overall capacity growth in the power sector, will allow the company to sustain is growth momentum.

Its 60% subsidiary PTC Financial Services will get around 160 crore on monetisation of its stake in Indian Energy Exchange and Ind Bharat project, which will fetch a pre-tax IRR of 76% and 30%. This will further unlock value for PTC. PTC's return on equity has gradually improved in two years to 6.5%. The stock has corrected by 40% in past six months. It is currently trading at price to earning multiple of 16, which is below its three year average multiple of 28.4. Given the high growth and low risk business model, the company provides a safe investment opportunity in the power sector, where most of the other companies are struggling with high fuel cost and low merchant tariffs.