Stock Pick from Power Finance Sector

HERE IS WHY

• Improving scenario for the power sector and an outstanding sanction of Rs 5300 crore will drive the growth.

 • Moderation in funding costs and gains on equity investments to boost profitability.

The existing power shortage in many parts of northern India highlights key challenges for the Indian economy. Although India has the fifth largest electricity generation capacity in the world, pegged at 192792 MW, but still it does not meet the country’s power demand. Nonetheless, with new government in the centre, we believe it will boost electricity generation by bringing some reforms in the coming years. One of the companies that will benefit from such reforms is PTC India financial services (PFS) which caters the financial need of entire energy value chain.

PFS is owned by PTC India and is focused on providing financial solutions to projects in the energy value chain. Apart from providing assistance (both debt and equity) to energy projects the company has forayed into financing infrastructure facilities like private railway sidings, gas pipelines and power transmission project.

At present the company has an outstanding sanction of `5300 crore which grew at a CAGR of 103 per cent over FY2010-14, out of which 70 per cent has been sanctioned to thermal power generating companies. Hence, future performance of PFS mainly depends on performance of power companies especially thermal power generating companies which is expected to perform well in near future. With the move of government to allow private players to mine and sell coal, one of the major problems of power companies seems to be solved since the state-owned monopoly is unable to meet demand. On another hand during FY’14 a fair amount of tariff hikes (between 1-24 per cent) has been recorded in 15 states of the country, which will increase the topline of the companies, which augurs well for PFS.

As far as its assets quality is concerned, PFS’ gross non-performing (NPAs) ratio stood at .09 per cent as on 31 March, 2014, while its net NPAs ratio is nil. Net interest margin of the company stood at 6.91per cent as on 31 March, 2014 which is higher as compare with its peers. Cost to income ratio of the PFS has shown significant improvement during the year and came down to 12.4 per cent in FY’14 against 13.7 per cent in FY’13, which will enhance profit margin of the company. At present PFS has around `301 crore of equity investments in different companies and it has planned to exit from one of the investments in FY2015, which will boost the profit of the company. In past also, it successfully divested its stakes in projects such as India Energy Exchange and Ind-BharaThenergy with substantial gains and in FY2014 it exited Meenakshi Energy for Rs 82.2 crore. Till now the average return from equity investments has been around 25 per cent.

On valuation front, the stock is trading at 1.3x of its price to book value (P/Bv) Given the growth prospect of the company, the scrip demands higher valuation. Therefore, we recommend a buy on this counter with a 20-25 per cent returns perspective in next one year.