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    Projects and recovery to power PTC India stock in coming years


    Despite a small jump in share prices due to fundamental improvements in the fourth quarter, PTC India continues to trade at compelling valuations.

    Pick of the Week: Projects and recovery to power PTC India stocks in coming years

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    After several lacklustre quarters, PTC India was able to beat street estimates in the fourth quarter of 2012-13, helped by a hefty jump in volumes even as the company saw its margins drop. PTC India’s volume is likely to get a boost as state electricity boards are expected to increase spot purchases to pacify the electorate during the upcoming election season. The commencement of long-term power purchase agreements (PPA) should sustain it in the years to come.

    PTC India has signed PPAs to produce a total of 10,000 MW for various projects and most of these are already under implementation. Of this, around 2,000 MW of capacity is expected to come on stream in 2013-14, about 5,500 MW in 2014-15 and about 2,500 MW in 2015-16. Its tolling business, where PTC India supplies coal and gets it converted to power from generating companies on contract basis, continues to do well.

    This segment contributed more than 50% of the company’s current profits. Due to favourable merchant power rates and low prices of imported coal, the tolling margin is placed at around 70 paise per unit now. However, investors should note that this is a risky business. Though there could be further upside if global coal prices remain weak, it may affect the company if coal prices jump up for any reason. A 5% change in coal prices will result in 14% swing in the company’s EPS.

    The receivables situation is also improving at PTC India due to the completion of recent financial restructuring of state electricity boards. The company has already recovered Rs 500 crore from Tamil Nadu and Uttar Pradesh distribution companies in 2012-13 and is expected to recover another Rs 700 crore from them in 2013-14. These recoveries should help sustain PTC India’s free cash flow generation in 2013-14 as well.

    Despite a small jump in share prices due to fundamental improvements in the fourth quarter, PTC India continues to trade at compelling valuations. In addition to the current earnings, investors also need to calculate the embedded value because of its stake in PTC Financial services and investment projects. All this makes PTC India a very good long-term bet.

    Selection methodology: We pick the stock that has shown the maximum increase in consensus analyst rating during the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weightages to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell).

    An improvement in rating indicates that the analysts are becoming more bullish on the stock. To make sure that we pick only companies with a decent analyst coverage, this search will be restricted to stocks that have been covered by at least 10 analysts.

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    The Economic Times