Investors with a two-three year horizon can still consider buying the stock as it offers potential for upside.

One, the company should reap gains from an expanding share of long-term power sales in its portfolio. PTC India, the country’s leading power trader buys surplus power from State utilities and independent power producers (IPPs) and sells it to customers. Long-term power contracts with customers (largely State distribution utilities) ensure greater revenue certainty for the company.

Also, unlike sales made under short-term contracts (less than a year), trading margins on long-term sales are not capped. In the past, realisations from long-term sales have, on an average, been better than that on short-term sales. The stock is cheap too.

At ₹72, it discounts the trailing 12-month earnings by around eight times, much lower than its five-year average valuation of 14.5 times.

Long-term agreements

PTC India sold 37,137 million units of power during 2014-15, 6 per cent higher than the previous year, much slower than the double-digit growth of earlier years. Even as power sold under long-term contracts grew 20 per cent year-on-year, short-term sales contracted 3 per cent. Muted power demand and congestion in transmission network impacted volumes.

What offers comfort though is that PTC India has been expanding its share of long-term power sales. From 33 per cent share in 2012-13, these now account for 40 per cent of the company’s power sales. It aims at raising it further to 50 per cent in the coming years. As on March 2015, PTC India had signed 7.5 GW capacity of power sales agreements, 6 per cent more than a year ago.

PTC India is also the nodal agency for cross-border power trading, giving it an advantage over other power traders.

But that short-term power sales will continue to account for at least half the company’s sales is a concern. This exposes the company to the volatile merchant market. With trading margins on short-term sales capped at ₹7 paise a unit, volume growth holds the key. But given the current poor financial health of state distribution utilities (or State Electricity Boards ), higher power purchases by them cannot be assured in the near term.

Financial performance

In 2014-15, PTC India’s revenue (including penalty for late payments) grew 14 per cent to ₹13,082 crore. Income from power traded too grew a healthy 15 per cent during the year. But, the company’s operating profit fell 14 per cent to ₹271 crore as power purchase costs rose. Further, hit by an exceptional loss, net profit declined 19 per cent to ₹203 crore.

A pick up in power demand in the next few years should however, boost the company’s top-line and bottom-line. This should come about as improved domestic coal supplies bring down the power purchase costs of SEBS. Also, demand from industrial customers, which accounted for 9 per cent of PTC India’s sales in 2013-14, should improve as economic growth gathers pace.

Subsidiary operations

PTC India Financial Services, a 60 per cent subsidiary of PTC India, contributed about a fifth of the company’s consolidated profit last fiscal. Hurt by higher cost of funds and additional provisioning, its profit fell 23 per cent to ₹161 crore in 2014-15.

While loan sanctions grew 63 per cent, disbursements declined 19 per cent primarily due to slow pace of implementation of power projects. This should change for the better. With the government making efforts to kick-start stranded projects, the company’s loan book should grow at a faster pace.

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