PTC India Financial services

Stock Opportunities Untested - but worth a good look
1

I have been following this blog and been part of the audience since last year. Trying my scuttlebutt here with PFS. Please forgive me if there are any mistakes in my below post as i am still a novice learner in this market ( I know this blog is here to encourage people like me :slight_smile: ).

I have recently come across this not so hidden-gem but a potential investment PTC India Financial services (PFS). Posting my views and rationale here and expecting the financial sector experts opinion :). ( Believe Vinod and Dhwanil can shed more light :slight_smile: .

PFS is promoted by PTC India Ltd as a special purpose vehicle to cater to the financial needs of the infrastructure sector in INDIA. PFS mainly concentrates on the needs of Renewable energy sector which is slated to see exponential growth over the next few years. The main difference between PFS and other industrial and infrastructure finance companies is that it takes part in the equity investment of the projects along with extending the financial assistance.

Given that NAMO is slated to become the PM of India, who is a pro development leader will certainly kick-off the investment process in India. Coupled with the immense potential that the Indian Infrastructure sector offers i believe the company is on the verge of seeing excellent growth in its loan book.

Financial numbers :http://www.screener.in/company/?q=533344( Thanks to Ayush )

Positives:

Decent pedigree,60% promoter holding with no pledging.Available at very decent valuations 0.6 BV and 6 PE.

Nil Net NPA.

No dilution of equity as company is adequately funded with CAR at more than 32%.Immense potential to scale up their loan book if the infrastructure investment kicks start in INDIA post elections. Remember similar situation around 2009 for Bajaj finance as it was having very high CAR and when the economy started growing they havecapitalizedtheopportunity verywell by increasing the loandisbursements. Of course we cant compare Bajaj’s management with PFS.

High dividend payout ratio and the dividends will increase if the economy turns around and their equity investments see cash profits.

Cost of funds can decrease further if RBI starts cutting the interest rates.

Best in class rating for its funds.

Negatives:

PSU tag.

Higher NIM’s may not sustain in the long term.

El-nino risk and Inflation risks persists which would eventually impact RBI’s decision on interest rates.

I know that i have not covered many points here. But believe experts in this forum will drive us in correct direction in taking the decisions.

disclosure : entry made around 14.9rs with 0.5% portfolio allocation. Have idea to scale it upto 10-15% levels.

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Hi Vinod/Ayush/Dhwanil,

Believe you guys are following this one and can shed some more light on the pros and cons of this script

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Equity Investments

  • PFS is one of the promoters of India’s first power exchange viz. Indian Energy Exchange and currently holds approx 5% equity after divestment of 21% stake in exchange. The exchange holds more than 80% market share. The exchange was set up to catalyse the modernization of electricity trade in the country by ushering in a transparent and neutral market through a technology-enabled electronic trading platform.
  • Conventional Projects
    • 26% equity stake in 3*63 MW (i.e.189 MW) imported coal based power project in Thoothukkudi District, Tamil Nadu. The project was fully commissioned in 2011. PFS has made successfully exit from the investment in Sep 2011.
    • 20.55% equity in 2*350 MW thermal power project in Orissa. The first unit of the project is expected to be commissioned by July 2013.
    • 14.66% equity in stage I of 2*660 MW thermal power project in Andhra Pradesh. The project is expected to be commissioned in September 2014.
    • 17.84% equity in the 1000 MW (Phase I â’ 300 MW and Phase II â’ 700 MW) imported coal based power project in Andhra Pradesh. Phase I is expected to be to be commissioned by August 2012 and Phase II in December 2013.
  • Non Conventional Projects
    • 37% equity in a 99.45 MW wind power project in Maharashtra. Phase I of 41.25 MW has been commissioned and Phase II is under development.
    • 26% equity in a 10 MW biomass power project in Maharashtra. The project was commissioned in 2009.

Debt Financing

As on September 2013, PFS has sanctioned approx Rs 10,130 Crore in form of Long term and short term debt assistance to various power projects which will help to generate more than 30,000 MW capacity in coming years. As on September 2013, PFS has outstanding loan book of approx Rs 3,125 crore.

Some of major debt assisted projects are:

  • 45 MW wind power plant in Pratapgarh District, Rajasthan wherein PFS has sanctioned Rs 217 Crore. Project is Operational since March 2013.
  • 45 MW wind power plant in Sangli District, Maharashtra wherein PFS has sanctioned Rs 221 Crore. Project is Operational since July 2013.
  • 25.2 MW wind power plant in Rajkot District, Gujarat wherein PFS has sanctioned Rs 93.60 Crore. Project is Operational since April 2012.
  • 2*15 MW Solar power plant in Surendranagar District, Gujarat wherein PFS has sanctioned Rs 100 Crore. Project is Operational since December 2012.
  • 20 MW Solar power plant in Jodhpur District, Rajasthan wherein PFS has sanctioned Rs 107 Crore. Project is Operational since February 2013.
  • 3*660 MW coal based power plant in Bara, Allahabad, Uttar Pradesh wherein PFS has sanctioned Rs 250 Crore. Project is likely to be commissioned by Sep 2014.
  • 1*600 MW coal based power plant in Janjgir Champa District, Chattisgarh wherein PFS has sanctioned Rs 200 Crore. Project is likely to be commissioned by April 2014.
  • 2*300 MW coal based power plant in Butibori District, Maharashtra wherein PFS has sanctioned Rs 250 Crore. 1stUnit has been commissioned and 2ndUnit is likely to be commissioned by March 2014.
  • Acquisition of operational 34.5 MW wind power plant in Coimbatore District, TamilNadu wherein PFS has sanctioned Rs 124 Crore.
  • 10 MTPA Coal Mining Project in Sarguja District, Chhattisgarh wherein PFS has sanctioned Rs 200 Crore. Coal block has started production since January 2013.
4

In addition to what others have added:

)- They are moving towards more non-conventional (wind) projects and they expect the commission time to be lower (and therefore, lesser risk).

)- PTC holds 60% and PTC itself is held by too many entities with promoter holding of only 16.2%. Private names like HDFC, Reliance and Morgan Stanley hold some. HDFC has about 6.6%. So, not sure how much influence government can exert on the board. Maybe senior investors can comment. The clear negative is that they have the so called “professional management” (not very useful in my view) and there is no “promoter” who has his skin in the game.

To me, it is one of the things like CanFin Homes sometime back when it was selling for 130 odd Rupees and it was clearly undervalued.

Their NIM is coming down, which is expected, given their high NIM. But, hopefully it settles down soon. Net NPA is nil.

If they continue to deliver like they have done in the past couple of years, the stock should eventually follow the earnings and get re-rated. If theysuccessfullyexpand to other infrastructure projects, it is icing on the cake. I think their success will have a lot to do with how they adjust to the changing environment and not a lot on who is ruling.

Disc: Invested and around 9% of my portfolio. The %ge allocation will change without any action from my end because of varying stock prices!

5

Was going through the presentation athttp://www.ptcfinancial.com/career_pdf/PFS_Result_Presentation_q3_fy2014.pdf

and PFS has significant equity investments in Ind Barath Energy Limited.

Promoter of Ind Bharath Energy Raghu Rama Krishna Raju, a politician is alleged to have a involvement inone of the biggest scams in AP (APIIC-Emaar land scam).

He unsuccessfully tried for MP seat from various political parties.

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Hi Sandeep,

Yes, PTC FInance looks very interesting. With majority of the problems of the power sector in front of us, any fixes by new government can result into a big revival for this sector. Even otherwise, PTC Finance seems well placed to capitalize on the good capital adequacy it has and grow its loan book aggressively.

I have been trying to get some numbers to get more insight but that it taking time.

Based on the limited work I have done, the risk reward seems attractive.

A big concern remains about the PSU nature and hence don’t think it can be a very long term idea but next 2-3 years may be very interesting.

Ayush

Disc: I hold

7

Hi Ayush,

Yes. I concur with you. This is not a kind of bet where in one can sit allocated for long-term. Given the undervaluation and the negatives of the sector which are well priced. It has seen through the bad phase pretty comfortably and is certainly at an inflection point in terms of growth.High CAR coupled with sector and economy turnaround should ensure higher disbursements in the next 2 yrs. It can easily do 30-40% CAGR in earnings.

Lack of strong promoters and presence of many hands is a big deterrent but looks veryopportunisticat this price.

8

Hi Sandeep,

Though, typically, I am very sceptical of investing in PSU stocks, this one seems to be a mis-priced opportunity where downside seems to be limited but if things work out, one can get very good upsides. Personally, I like such opportunities as such opportunities provides good margin of safety and typically one is not paying much for growth. Here is my take

Few positives

)- Uniquely positioned itself as provider of range of financing options across energy value chain. In addition due to the pedigree of parent (PTC) it does understand energy landscape better than its peers. This clearly distinguishes it from other players like IDFC and L&T Infrastructure finance.

)- It’s one of the few NBFC qualified as Infrastructure Finance Companies. This status enables it to reduce its borrowing cost due to it’s ability to issue tax free Infra bonds and international borrowing as ECB upto USD 500 million. In addition, it can also leverage its PSU status to get borrowing approved from multilateral institutions like IFC

)- It’s NII has been consistently and steadily rising since its inception. It’s NIM has ranged from 6.09% in 2010-11 to 8.5% in 2012-13. Though, it has declined for 9M FY 2013-14 to 6.93, it is still very decent. NIM also is comparable with leading NBFCs such as STFC, IDFC & L&T Finance for which the NIM ranges from 6.7-7.45% in 2012-13.

)- Company has astutely invested in equity and mezzanine financing which has generated very decent returns. All the exits done by the company has generated good returns. Further monetization of the current equity investment is likely to provide zing to the good performance on debt side.

)- Asset quality seems to be good with net NPA at zero, though 4 years of track record is hardly any indicator for how thing will pan out for next 20 years.

)- Company is provisioning for bad loans at twice the mandatory provisioning norms (0.50%) specified by RBI (0.25%). This is a pointer to not too aggressive accounting policy by the management

)- Increasing focus on renewable sector means faster implementation of projects and hence faster conversion from sanction to disbursement.

)- It’s trading at 0.65-0.7 times book and has RoA of above 3%. Hence stock definitely looks cheap.

Risks:

)- To me “PSU” tag is a one of the largest risk. Any company where management show disregard for minority shareholder’s interest shall be treated with extreme care. GoI has shown such disregard on many occasions in the past. If NDA comes to power, hopefully, it will not resort to such actions (going by their past track record and Mr.Modi’s record). However, as they say in investing, “hope” is very dangerous thing !

)- As is true for any financial service firm, if company is not able to manage the quality of its assets well, very high leverage of the company (due to inherent nature of its operations) can prove to be disastrous and may wipe out most of the profits.

)- Only 5 years of operating history shall also be considered as risk as company has not experienced full business cycle of boom, pleatau and bust! This means, company and management has to still prove it’s mettle and demonstrate consistency and conservatism in years to come. This is an “unknown” for investor and any extrapolation from limited historical data can be dangerous. One has to keep an keen eye on actual performance in the time to come and take necessary actions in case if the performance starts deviating from the one demonstrated in the past.

Overall, I feel, the risk-reward is in favour of an investor and if the company continue to grow at decent growth rate (20-25%, which is a very reasonable target considering it’s past track record, size of opportunity and possible revival in infrastructure cycle) and maintains its asset quality, it can yield very good results.

9

http://www.livemint.com/Money/rsS94JYtKQol7pgmQTkUHJ/Financial-services-subsidiary-adds-heft-to-PTC-India-stock.html

PFS seems to be a gem of an investment for PTC.Hefty profits from equiy sale for PFS

10

http://www.ptcfinancial.com/board_of_directors.php

Seems board of directors credentials are excellent

11

Good results from PTC FIN.

Net profits up almost double to 207 cr in fy 14 from 104 cr in fy 13. Although this includes profits on sale of meenakshi energy worth 82 crores which might not recur next year.

dividend of Rs 1 per share should provide a good downside cushion to stock price.

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Needless to say that growth in core business would hold the key. Looks good to capitalize on this front as well.

I concur with views of Ayush and Dhwanil above. Should be able to grow its loan book without any dilution and sure has looked like a mispriced opportunity since long. Exitsfrom its investments would keep providing some kicker to the numbers in next 2-3 years.

Mgmt. had indicated in last quarter’s concall, that it would look forward to exit couple of equity investments in next 2 years and also would look to venture into infrastructure financingother thanpower.

Disc: Invested

13

Good Set of Numbers … Believe its just the beginning and should continue for at-least a year or two.

More details are awaited before we can plunge further. CAR declined to 25% odd. That’s a significant decline in a quarter. Should keenly read FY14 annual report as and when it is out.

14

Not so good news…

the Board of Directors has approved setting up of an Asset Management Company (AMC) as a subsidiary company of PFS, and has also decided to recommend increase in the authorised capital of the company from Rs 1,000 crore to Rs 2,000 crore with a provision of preference share capital of Rs 750 crore, subject to approval of shareholders and regulators.

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Very decent results even after considering the one time income from sale of Meenakshi energy. Company has largely held onto the NIM and spreads (with small dip)while the loan book has grown at crisp rate. We should also keep in mind that though the sale of equity investment is not a regular income, it will keep on repeating in medium term as company exits out of some of the other equity investments. Hence from time to time, we can get bumped up earnings.

At current price, it still looks interesting and downside is limited especially after the dividend of Rs. 1, which makes the div. yield 6%.

Discl: Taken a initial position at average price of 16.5

16

Yes, very good results and maintaining of liberal dividend payout is really good. Given the quick growth in loan book, it seems we will see good interest income in coming quarters also.

Ayush

Disc: I hold

17

In an interview to CNBC-TV18, RM Malla, MD & CEO, _PTC India Financial Services_ shared his views on the companyas Q4 numbers.

Below is the verbatim transcript of the interview.

Sumaira: It looks you had higher provisioning but that has been negated by the higher other operating income that you have received this quarter as well. Can you take us through what the outlook now would be for FY15, could you maintain this kind of growth in your topline?

A: We have excellent numbers, our profit has virtually doubled essentially. It is because of growth in our business and our asset size, that is has doubled. However, talking about the provisions , we are fortunate to have nil non-performing asset (NPA). These provisions definitely are against the standard assets, so since our balance sheetsa size has increased, this is a provision for standard assets and unlike other non banking financial companies (NBFCs) and as per Reserve Bank of India (RBI), instead of providing only 0.25 percent we provide for 0.5 percent, so that is why provisions are seen higher. Looking at the future, I strongly believe that we will continue to have our journey of outward growth and we expect very interesting results in future as well.

Reema: The whole year has been so good for you, your total revenue for the entire year has gone up by 91 percent, the interest income has gone by 67 percent, your net interest income is up close to about 39 percent. Can this run rate continue for FY15, if you could tell us what is the expectation on the net interest income (NII) growth as well as on the net interest margin performance?

A: Our spread is about 4.5 percent, our cost of fund is close to 9 and yield is close to 14 because we have were not leveraged our debt equity ratio today is only about 2.5:1 but going forward our debt level will improve because as NBFC we can go up to 6:1 but we will not reach that level in this financial year or next 18 months. So, I believe our spread will continue at this level and with the increase in the balance sheet rise the impact of that will happen in next year, so I believe our results will be robust in the next financial year as well.

Reema: Can you quantify that?

A: I will not be able to quantify but I believe the growth which we have seen this year, the next year growth will be on similar line.

Sumaira: In terms of your asset quality, it is fantastic if I see your gross NPAs are just 0.09 percent, net NPA are nil, is this kind of asset quality that we can continue to expect from you?

A: I strongly believe that because I would like to share with you of seven proposals which come to us for consideration, only one passes the muster, so that goes to say that we are very cautious while selecting the borrower and we have a very strong risk department and we have the system and procedures in place where we ensure that at the time of selection itself we are very cautious and choosy.

Reema: What is the outlook on disbursements for FY15?

A: I strongly believe that we will double our balance sheet in next 18 months - thatas the outlook we have and the size is so large - we are in power and infrastructure and the market is so large that we strongly believe that we can double our balance sheet in next 18 months.

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PTC India Financial to float energy sector-focused PE fund (http://www.vccircle.com/news/alternative-investment/2014/05/02/ptc-india-financial-float-energy-sector-focused-pe-fund)

PTC India Financial Services Ltd (PFS) has approved a plan to float an asset management company (AMC) as part of a move to expand its roster of financial services for the energy sector in the country, as per a disclosure by the firm.

This AMC will also begin with launching a private equity fund for the power sector and will have a corpus of up to Rs 300 crore ($50 million), the companyâs chief RM Malla told The Hindu Business Line.

Of the total, nearly 20 per cent of the initial corpus of the proposed PE fund would be pooled in by PTC India Financial Services and its promoter company PTC India Limited, Malla told the newspaper. The company will invest seed money (as equity) from the proposed PE fund in various energy companies, he added.

Without elaborating, he also said a West Asian group has expressed interest to be part of this PE fund.

PTC India Financial Services works as special purpose investment vehicle and provides financial services to entities in energy value chain â investing in equity or extending debt to power projects in generation, transmission and distribution, fuel sources, fuel-related infrastructure like gas pipelines, LNG terminals, ports and equipment manufacturers, etc.

A subsidiary of PTC India, the firm had previously raised funding from investment arms of Goldman Sachs and Macquarie in 2008 and went public in late 2010.

For the year ended March 31, 2014, the non-banking finance company’s net profit almost doubled to Rs 208 crore from Rs 104 crore registered in the previous fiscal.

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PFS’s business model of restricting itself to energy sector can both be a boon or bane so one needs to keep in mind the risk that comes from a concentrated play in one sector.

I would want to find out

1). if the cost of funds, which currently is at 9%, will continue around this level going forward as debt to equity ratio rises

2). Interest rate of 14% average on its assets seems to be a play of both debt and equity and also mezzanine financing. Will this activity be passed onto the new AMC being set up.

3). Will PFS then become a pure play debt provider

4). Speciality lenders like PFC/REC usually stake first claim to the escrow funds that get created by the discoms. In this scenario, will PFS will play a second fiddle or will it get pari passu rights to the escrow funds

5). I would want to study the balance sheet of the company in lot more detail to see the quality of receivables and the levels of receivables going forward

Overall PFS looks like an interesting play as the power sector is beginning to come out of the trough ( though this story is still unfolding in courts-Delhi Discom/NTPC case is in SC) and the Regulatory assets game is yet to unfold

Sunil Arora

Disc: small position (1% of portfolio)

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Ptc india is zooming …part of it is cause of new found love for psu and power plays. On the charts multi year resistances have been broken with big volumes.

How can one find out . who is buying/selling

What are the odds now at this price. Major rerating is over for the stock.more of performance based play now.