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Raghuvir Srinivasan

INVESTMENT can be considered in the stock of Power Trading Corporation (PTC) with a medium-term perspective. At the current market price of Rs 46.35, the stock discounts the 2003-04 earnings 21 times. Electricity trading, as a concept, has caught on strongly and PTC is well-positioned to capitalise on the trading opportunities arising from demand-supply mismatches in power.

Apart from the first-mover advantage that it enjoys, PTC also has a robust business model with a workable payment security mechanism to cover possible defaults by buyers. Though competition is already kicking in, PTC will continue to hold the upper hand at least over the next year or two. There appears to be good upside potential in the stock from the current valuations.

Power trading: PTC trades in power by capitalising on demand-supply mismatches from seasonal factors, time-of-the-day fluctuations (where a generator may have idle capacity for a couple of hours daily and a buyer may be in need of peaking capacity at the same time) and also in medium-term transactions.

PTC also engages in cross-border power trading as it buys power from a couple of generating stations in Bhutan and sells it in the eastern region.

The company is the nodal agency for exchange of power with Nepal, which has good hydroelectric potential.

Business prospects: PTC's earnings is made up of a margin on trading which is now 5 paise per unit for domestic trading and 2.5 paise per unit for power imported from Bhutan. As competition catches up, the margins could come under pressure, but the pricing system could itself undergo a change with margins getting linked to risk — higher risk will fetch a premium for PTC.

With trading arms already set up by National Thermal Power Corporation, Tata Power and Reliance Energy, apart from a couple of other private sector non-power companies, competition is bound to get tough. PTC has already signed MoU's with prospective sellers currently implementing/planning projects adding up to a capacity of 3,700 mega watts over the next five years. The company is also targeting captive power plants to trade in their excess capacities.

Competition could also lead to the advent of "take-or-pay" clause in deals which enhances the business risk. Again, to clinch deals, the company may also be forced to share wheeling charges and line losses with the buyers and sellers.

Such risks notwithstanding, the potential in the business is immense and PTC's biggest advantage would be the knowledge of the business that it has acquired over the last three years as also the shelf of buyers and sellers that it has already built up.

The rapid growth in trading volume from 1.6 billion units in 2001-02 to 11 billion units in 2003-04 clearly shows the potential.

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