Investors with a high risk appetite can consider subscribing to the initial public offer of PTC Financial Services (PTC Finance), an infrastructure financing company. PTC Finance is a subsidiary of Power Trading Corporation and has benefitted from its parentage by way of initial referrals for equity and debt financing. PTC Finance engages not only in debt financing of power generation projects but also picks up equity stakes in them.

The offer size is Rs 433 crore, with Rs 352 crore worth of fresh equity, bolstering the company's capital base. At the upper end of the price band for retail investors (Rs 27), the stock is offered at 1.47 times its expected FY-11 book post-equity infusion. The price-earnings multiple would be 33 times of expected FY-11 earnings. The price band of PTC Finance is Rs 26-Rs 28 a share with Re 1 discount to retail investors.

However, that book value mainly represents the equity infusion. The company is under-leveraged and the return on equity has to go up significantly over the next couple of years to justify this valuation. Therefore, a 3-4 year investment horizon may be necessary for decent returns from the stock. Other finance companies in similar businesses — Power Finance Corporation, REC and IDFC are trading at price-book ratios of 1.8-2 times.

The long-term debt-equity ratio of the company is 0.46 as against five times in case other infra financing companies.

Financing opportunity

Power sector financing continues to be untapped despite huge inflows into the sector. Power financing needs in the country are large given the spending of Rs 10 lakh crore in the current Five-Year Plan (2007-12), and Rs 12 lakh crore outlay during the 12th Five-Year Plan. Around 50 per cent of the outlay would fund power generation assets.

The key differentiator for PTC Finance is its equity portfolio (principal investments) in projects usually referred by its parent, which has signed power purchase agreements. These investments have the potential to yield higher returns than debt, if the projects take off on time. In some cases agreements give the company attractive post-tax returns after buyback by the promoter. Additionally, PTC Finance also has an exit route available by way of IPO or put option in medium-term which offers value unlocking opportunities.

The current equity investment book is at Rs 418 crore with additional investment commitments of Rs 143 crore. The capacity of the projects in which PTC Finance committed to equity stood at 3,221 MW with around 175.6 MW operational. In future, the equity investments may be constrained given that it can only fund sub-Rs 100 crore equity investments.

Debt financing

PTC Finance has a modest debt portfolio of Rs 595 crore and close to three times its current loan book is sanctioned and yet to be disbursed. The portfolio has no non-performing assets. However, given that the projects may be in the early stages of commissioning, it is too early to comment on the quality. The portfolio also includes renewable energy.

The sanctioned portfolio is supporting a capacity of 8,928 MW with a yield close to 16 per cent. Such high yields are translating into strong spreads even as the cost of funds is high at 10.17 per cent.

Two trends are likely. One, the yields may moderate as the company may fund bigger projects, with the portfolio shifting to longer maturities.

Secondly, the cost of funds may also come down as it diversifies its resource base with instruments such as retail infrastructure bonds and external commercial borrowings.

Even as these two factors neutralise each other to some extent, the current spread of 5.5 per cent may not be sustainable without deploying in high risk assets. The yields on loans have come down from 19 per cent in FY-10 to 15.74 per cent during nine months ended FY-11 (annualised). The yields are 3-4 percentage points higher than PFC and REC.

Near-term rate risk

Rising interest rates may not be a big concern for PTC Finance given the under-leveraged nature of the company. After capital infusion, the December-end capital adequacy would go up from 60.57 per cent to 94 per cent. Additionally, the pricing power of PTC Finance is high given that 85 per cent of the loans are on floating rate.

For the nine months ended December 2010, the company posted a net profit of Rs 32 crore up from Rs 25 crore during the whole of previous fiscal. The company is also engaged in advisory services and buys future carbon credits for selling it to a third party. For nine months ended December 2010, the return on net worth (annualised) for the company worked out to 6.4 per cent. This may improve significantly as the company uses more debt for on-lending.

Despite strong demand for financing, PTC Finance stock may only suit investors with high-risk appetite. For one, it has a short operational history. Two, equity exposures while giving higher return on capital employed may be more risky.

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