PTC India - A No Brainer (?)

Stock Opportunities
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I always take the Private Buyer approach to stock investment.

Here is my simplest logic to purchase the Company at the Current Market Price of Rs. 72 per share.

1). The Company holds 33,72,50,001 shares of PTC India Financial Services Ltd. â a well-recognized, publically traded company (which for all intents and purposes we must forget is a “subsidiary” of the Company - just think of it as an listed, marketable equity investment held by the Company).

The stock of PTC India Financial Services currently trades at around Rs. 55 on the exchanges. Taking a huge Margin of Safety, I will assume an âAll Weather / Bear Marketâ price of around Rs. 30 for this stock â which incidentally is also approximately its Book Value for the year just ended.

This gives me and overall value Rs. 34 per share of PTC India.

2.If the Company just settled its accounts in the market (and there is no large âbadâ outstanding I know of right now â plus they have no inventories, it is all just cash) as of 1st October, 2014, it would receive Rs. 57 per share. You could also look at this as the Ben Graham style Liquidation Value of the Company - Net Current assets minus ALL liabilities. By the by, out of this, Rs. 19 per share is actually held in cash.

Once again, let us be clear, I am assuming a 50% discount on the CMP of the PTC Financial Stock that it holds plus my Net-Net figures are from their half yearly Balance Sheet more than 6 months ago.

There’s Margin of Safety and then there’s MARGIN OF SAFETY.

**This means a total Liquidation Value or Net CashEquivalents****of Rs. 91 per share. This is a discount of 26% to the current Market Price. **

This would be “inefficient” enough of the Market if the Company had a poor or dwindling business.

Not here. PTC India has a wonderful, wonderful ongoing business which should â on the whole â do better than OK with time. Its the largest power trading company in the country promoted by some of the biggest names in the Power Industry of India (it is quasi-PSU, by the way). A business that will continue to generate cash for me over a very long time.

This business, I am receiving free of cost. Actually I am being paid more Rs. 19 per share to own to this great business.

Now, why does the market value this Company like this. That is something we must always seek to understand.

There are 5 reasons for Market Inefficiency. Emotion, Neglect, Myopia, Misinterpretation and Short Term Demand-Supply issues.

In this case its primarily Short Term Demand-Supply issues. LIC of India and HDFC Standard dumped a huge amount of stock into the market over the past six months. Why? I don’t know. And considering that most “funds” underperform the markets - I don’t hold them in much regard. So I don’t care either.

Secondly, there’s misinterpretation. They had one optically bad set of numbers last quarter. I say optically because it was just a write off in their Teesta Urja project which will get written back. Let us not get into that.

Now if someone knows something that I am missing, I would love to hear from you.

Mohit Kumra

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There are multiple threads on PTC India. Maybe Admin can consolidate them into one -

http://www.valuepickr.com/forum/techno-funda-picks/440447467

http://www.valuepickr.com/forum/not-so-hidden-gems/304178976

-HG

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@mokumra - wont the concept of holding company discount apply here.
PTC India will never sell PTC India FS holding. Hence the value realization here is difficult.

What are your thoughts on the power trading business standalone?

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Valuation as per ICICI. I am not sure how logical it is to value EPS 6x to arrive at core business value.

The Ministry of Power has revised the guidelines for Case I bidding, in which it has excluded power traders (like PTC) from participating in LT Power procurement bids. This would negatively impact PTC as the company is yet to sign a power sale agreement (PSA) for ~2,850 MW of capacity for which PPA has already been signed.

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"It is not what you are looking at, it is what you see…"
Henry David Thoreau

Dear Elusionist,

Why complicate everything with these “holding company discounts” and this and that.

Just look at it as a standalone company that you - a billionaire investor - are being offered for sale. Forget about everything else.

The sale price is Rs. 60 per share. The company has Rs. 28 in cash in the bank - CASH. Another Rs. 34 if you calculate a very conservatively valued market price of a listed company called PTCFS (forget about it being a subsidiary and everything). That is more than the price you are paying in the first place.

THEN. You have another Rs. 31 in cash receivables etc. - none of which is dodgy or doubtful. And you have a 11% stake in the Teesta-III HEP in Assam. And you have own stakes in Athena Power and others.

ON TOP OF THAT. You are getting a wonderfully run business which is the market leader in its field whose rather conservative management expects business to grow at 10-15% in the next few years. More if a few macro issues are resolved.

So would you buy the whole company if you were a multi-billionaire…because I don’t know how you became a billionaire if you haven’t already taken that deal…

And as far as your comment to the effect that “…but the Company will never sell those shares…” are concerned - then theoretically the only way to value a company is its Dividend Yield. That is all the money you are REALLY getting. They are not going to give you the assets - so the book value / asset value should mean nothing. They are not going to give you their earnings - so the cash flow also has no meaning.
When in fact it does. That is what you and I look at when we purchase equity ownership in Companies through the medium of the Stock Markets - don’t we??
Just look at it as if you were a billionaire buying the entire Company. Forget about everything else. It is all yours. You will never go wrong that way.

Also, by the by, two very important developments are going to help this Company in the future.

a) Recap of the SEBs should be approved by the Cabinet today itself. This will help in two ways. First the possibility of them having non-performing receivables decreases. Two, the SEBs will now be in a position to purchase more electricity.

b) There is a humongous push for rationalization of the grid linkages over the next few years. That too will increase the business for them.

My two cents.

Regards,

Mohit

2 Likes
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Looks like this company has always been an undervaluation play. Looking at this company for the first time and quite attracted by its valuation. Since most of us are aware about the attractiveness of this opportunity, I’d directly jump to the points where I need to do more work or where I have some concerns (could be repetitive from previous posts) -

Points where I need more clarity before taking a call -

  • Impact of restriction on case 1 bids for LT contracts

  • what stops a big corporate group with deep pockets to enter this space

  • Why would two business models - PTC and IEX - co-exits?

  • Will there always be need for some a power exchange - OTC or electronics and why?

  • What kind of growth can it clock over next 2-3 years assuming SEB issues are resolved

Concerning points -

  • Regulatory overhang

  • capital misallocation - investments outside core business of trading

  • any bad receivables sitting in BS

Will update post completion of my analysis.

Best
Rajat

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Hi Rajat,

Thank you for your message.

Firstly understand this - my recommendation was essentially a
price-to-asset value gap. I made it pretty clear in my initial analysis.
PTC runs a pretty average ROE, low margin business - though the growth has
been decent. This better-than-average business it runs was only an
afterthought - just to make sure that it was not misunderstood as a “cigar
butt” either. So buying this business on the basis of its “prospects” in
itself is a flawed premise.

So - you are too late now. There is a 15% or so upside to Book (which I
would assume is fair-ish value considering the average business) - not
enough for me. I recommended it at 60 - that was a 50% plus upside.

In any case, I will attempt to answer as many questions of yours as I
possibly can :

Points where I need more clarity before taking a call -

Impact of restriction on case 1 bids for LT contracts

The management says that the impact won’t be much. I trust the management.
I have followed this Company for a decade now - they mean what they say.

what stops a big corporate group with deep pockets to enter this space

PTC is promoted by NTPC, NHPC, PGC and PFC. All of the big-daddies of the
power business. No one can possibly have that pedigree. Plus the business
model itself is average - I don’t see people running to enter this
business. Add to that decades of proprietory experience and tons of cash.

Why would two business models - PTC and IEX - co-exits?

IEX is an exchange. PTC is a middleman, a trader, a *vyapari. *No
comparison.

Will there always be need for some a power exchange - OTC or
electronics and why?

Once again, PTC is not an exchange. It’s essentially a financier.

What kind of growth can it clock over next 2-3 years assuming SEB
issues are resolved

The management is confident of 10% plus growth. I trust them. Once again.
Not a “growth stock”.

Concerning points -

Regulatory overhang

I don’t remember the last time the regulator bothered them with anything.

capital misallocation - investments outside

There is no capital misallocation as far as I know. They are in the general
field of “Power” - and they stick to it. Trading, generating, investing -
its all in power.

I trust this answers - to some extent - all of your queries.

Warmest regards,

Mohit Kumra

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The Promoter (i.e. the Govt) through a few PSUs holds only 16% in PTC India. Majorly by FIIs and DIIs. In such a scenario, how come the fund houses have allowed this company to run like a PSU? Can the share holders do anything and have a say in the Board?.

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IDs resign on CG lapses.

Times are changing for good

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I think it is for PTC Financial services India, Code PFS and not PTC India as such, I think this co has not much role in daily operations of PFS.

It is a listed subsidiary though. Can have similar CG issues in here too.

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Agree, however there was no thread for PFS, hence posted here, since Related parties

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This is the PTC Financial Services Thread PTC India Financial services - Stock Opportunities / Untested - but worth a good look - ValuePickr Forum

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