Company Background PTC India Financial Services (PFS) is a systemically important non deposit taking NBFC, promoted by PTC India Ltd (PTC). The company is primarily engaged in equity investment as well as debt financing to projects across the energy value chain in India. PFS raised Rs3.57 bn through an IPO by offering 127.5 mn equity shares @ 28.0 in March 2011. However, the stock got badly hammered post its listing owing to various concerns in the power sector. However, we believe PFS's equity investments and loan disbursements to power projects is comfortably placed in terms of fuel sourcing, regulatory approvals, etc. The company's loan book is adequately collateralized. As far as equity book is concerned the company has protected its rights well with committed IRRs (21.0% to 23.75%) and well structured exits. We believe at current valuation the stock looks attractive. We initiate coverage on PFS with a BUY rating and a price target of Rs 25 /share, implying an upside potential of 40% from current levels.
Investment Arguments:
Equity investments- Main value driver with well structured exits and committed IRRs PFS has a unique business model as in addition to loan financing to power companies, it also makes strategic equity investment in companies in the energy value chain in India. As of March 31, 2011, the company's equity investments aggregated Rs4.59 bn in eight companies. We believe that the company has protected its rights well with committed IRRs (21.0% to 23.75%) and well structured exits. Added to this, the company's representation on numerous boards enables them to get clear understanding of the ground level realities and operational issues. We expect PFS's equity book to grow to Rs 7.04 bn by FY14E.
Loan financing book to grow with increasing leverage: - Margins and return ratios to stabilize going forward. PFS is involved in providing debt financing as well as structured debt financing. Currently the company's loan financing book is very small mainly due to lower leverage of 1.0x (calculated post deducting equity investment from net worth). However, the equity raising initiative by the company recently through an initial public offer will provide enough room to increase its leverage, which will drive the growth in loan book going forward. We expect the loan book to grow at a CAGR of 75.0% (on lower base) over FY11-14E from Rs 6.76 bn currently to Rs36.38 bn with leverage increasing from the current 1.0x to 4.9x by FY14E.
Borrowing profile to get diversified - IFC status to enhance the company's ability to raise funds on cost-competitive basis currently, the company's borrowing profile is less diversified with NCDs and bank term loans constituting 58.0% and 42.0% respectively as of December 31, 2010. However, going forward the management has indicated that the company will explore various other avenues of raising funds and make its borrowing profile more broad based. In light of this, in Q4 FY11 the company has raised Rs0.42 bn through issuance of long term infrastructure bonds and is likely to raise funds through ECBs (agreement with DEG already in place) in the current quarter. The management expects share of bank borrowing to come down going forward to 20.0% by FY14E, while NCDs, ECBs and infrastructure bonds are likely to constitute around 40.0%, 30.0% and 10.5% respectively. PFS was granted IFC status in August 2010 thereby enhancing its ability to raise funds on cost-competitive basis.
Sector outlook and Valuation:
Over the last few months, power sector is plagued by various concerns related to environmental clearance, fuel security and linkages; long term PPA's, overall timely execution of the projects and worsening financial health of state electricity boards (SEBs). The discussion is going on between the power ministry, planning commission & coal ministry to make more coal available to such projects. India has seen huge investments in the sector over the last five years. Power being a critical sector for economic development and sustenance of growth of India's GDP and having serious ramifications for the stability of the financial system, we believe these concerns are likely to be addressed with appropriate policy action.
We have valued PFS in two parts i.e. equity investment book and loan financing book separately. For valuing the equity investments, we have assumed base case post tax equity IRR of 18% and cost of equity of 14%, to arrive at the multiple of 1.43 x to its current equity investment book of 4.59 bn. Applying this derived multiple to FY14E equity investment book of 7.04 bn and discounting it at FY12, gives us a value of Rs13.83/share. The loan financing book is valued at 1.1x its FY12E book value of Rs5.22 bn, thus giving us a fair value of Rs5.75 bn or Rs10.2 / share. This gives us the fair value for both the business at Rs 25/share in the base case scenario, implying an upside potential of 40% from current levels.2]HOW TO: Undo “Send” in Gmail ?
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