|Name||Reco Date||Reco price||Target||Prospero Rating||Report Date*|
|PTC Financial||10July2014||Rs. 34||Rs. 62||6.5 / 10||10Jul2014|
A) Company background:
PTC India Financial Services (PFS) is a systemically important non deposit taking NBFC, promoted by PTC India Ltd (PTC).
It is engaged in lending to projects across the energy value chain – thermal and renewable power projects in generation, transmission, distribution, and fuel related infrastructure like railway sidings, conductors, transformers etc. PFS has acquired the Infrastructure Finance Company (IFC) status from RBI which enhances the company’s ability to raise funds at competitive rates.
B) Investments arguments:
Presence across the energy value chain offers strong growth opportunities: PFS’s specialization in the renewable energy space, coupled with easy access to its parent PTC India’s project pipeline, has enabled 87% loan book CAGR over FY11-14. Its outstanding sanction in excess of Rs. 40bn, improved outlook for the power sector, and expansion within the energy value chain – development of coal mines, railway sidings, etc – will drive strong loan book growth over FY14-16e.
Margins to stabilize; Investment book to add to other income: Bank borrowings constitute 80% of PFS’s source of funds. Going ahead, we expect borrowing costs to moderate, led by borrowings from bonds and ECBs, and margins to sustain at 6% over FY14-16e. The company has equity investments in certain power projects, some of which could be liquidated over FY14-16e, given the improved outlook for the power sector. In the past, it successfully divested its stakes in projects such as Ind-Bharath Energy and Meenakshi Energy.
Diversified loan book mitigates asset quality risks: The Company has a fairly diversified loan book across the energy value chain – renewable energy (36%), thermal (33%) and others (31%). This coupled with strong appraisal and monitoring teams have resulted in robust asset quality, with GNPAs at 0.09% and restructured book at Rs. 1.6bn, or 3%. PFS was early in identifying the slowdown in power sector. It stopped sanctions in the thermal space since FY12 and cancelled slow moving orders (thermal) to the tune of Rs. 20bn in FY14.
Well capitalized for growth; Valuations attractive: PFS is well capitalized (Tier 1 at 25%) to pursue growth opportunities in the energy value chain. Strong loan book growth over FY14-16e will improve RoEs to 20%. At the current market price, the stock is trading at 1.1x FY16e book value, which is at a significant discount to its five-year average multiple of peer like PFC and REC, despite diversified asset book, stronger earnings growth outlook, and similar return ratios.
*Report Date may sometimes be different from Recommended Date.