PTC India Financial Services (PFS) Review and Analysis – Too Expensive to Buy the Financial cum Energy IPO despite Quality and Growth

PTC India Financial Services (PFS) a subsidiary of India’s state owned state-run power trader Power Trading Corporation (PTC) is coming out with an IPO to raise around Rs 438 Crores in the price band of Rs 26-28 with an issue size of almost 15.7 crore shares.This ~$100 million issue will also see the exit Macquarie India Holdings which will sell around Rs 81 crores.The company appears to be a bit on the expensive side asking for almost 30 times its annualized profits of around Rs 50 crores.The valuation seems appropriate for a high growth technology company rather than for a financial service intermediary.Though India’s Energy Sector is expected to see sharp growth in the coming decade,it does not imply that everything related to Energy gets a high multiple.

PTC India Financial Services (PFS) is diluting  27.88% stake in the public issue, which will lead to a total market captitalization Rs 1,567 crore or $350 million.PTC will haves its equity stake diluted to 57% post the issue while the other promoters  Goldman Sachs’ stake go down to 8% and Macquarie to 3%.

PFS Introduction

PFS was promoted by PTC  as a special purpose investment vehicle (SPV) to provide total financial services to the  energy value chain, which is mainly  investing in equity and debt to power projects in generation, transmission, distribution of electricity.

Anchor Investors

PTC India Financial Services Ltd. has raised nearly 658 million rupees ($14.5 million) by issuing 23.5 million shares to three cornerstone investors -HSBC Bank Mauritius , Capital International Emerging Markets Fund and Emerging Markets Growth Fund.Set up in 1999, PTC India is a state owned JV between National Thermal Power Corporation (NTPC), Power Grid Corporation of India Ltd (Power Grid), Power Finance Corporation Ltd (PFC) and NHPC Ltd (NHPC).

Investment Bankers

The IPO is being managed by SBI Capital Markets , JM Financial and ICICI Securities  , Almondz Global  and Avendus Capital

Pros and Cons of PTC India Financial Services

Advantages

1) Management – The company has experienced management drawn from top energy companies in the country.This is a substantial big moat for the company.Corporate governance standards are also quite high for the company.

2) Financials and Business Model – The Financials of the company are in the pink of health seeing 100% growth in the last year.The Net Margin at 47% for the last 2 years is also quite good.The Interest Spread on its Loan/Deposit at above 6% is also very comfortable and gives a big cushion.The NPAs are zero which makes the business model terrific for the company.The Capital Adequacy is quite high at 61%.

3) Growth – The company has been growing at a rapid pace since inceptino in 2006.The company has managed to grow its equity and debt investments substantially.Its current loan book is around  Rs 605 crore across 12 companies with  7,500 MW capacity.It has equity investments in 8 companies totalling around Rs 418 crores with another Rs 484 in the queue.The company has seen a CAGR of 371% in its asset books.

4) Power Industry Attractiveness – India is going to add around 82 GW in the next 5 years with a total investment of around $200 Billion with $120 Billion in Generation of Power alone.The massive investments needed in the Power Sector provides huge opportunities for growth

5) Infrastructure Finance Company (IFC) Status by RBI – The company got this privilege in 2010 which allows it to substanitally lower the cost of its funds.Advantages of being an IFC.

a) It is entitled to lend up to 25% of its owned funds to a single borrower in the infrastructure sector, compared to 20%
of owned funds by other NBFCs that have not been granted IFC status.

b) It is also eligible to raise ECBs up to 50% of owned funds without prior RBI approval.

c) It can raise capital through issuance of infrastructure bonds at comparatively lower yields, as holders of such bonds are entitled to tax benefits

Disadvantages

1) Valuation – Despite its strong growth,the pre-IPO valuation of PFS is quite high at 30x P/E,15x P/B and 15x P/S.The company has much higher valuation compared to its listed peer REC and PTC.

2) Small Size and Limited Operating History– PFS has a limited operating history of only 4 years and a small size.Other competitors in the power sector lending space are almost 20-30 times bigger than PFS.

3) Higher Interest Rate Spread and Margins will come down – PFS has much higher interest spreads of over 6% compared to around  3% for REC and PTC.Going forward this spread is going to come down alongwith its high Net Margin of above 47%.The company’s higher interest rate is also going to come down as it lends in larger amounts to more credit worthy customers.

Summary

PTC India Financial Services has substantial advantages of growth,a good business model in India’s booming Energy Sector.However the valuation of the company has been kept too high for essentially what is a financial intermediary.The growth of the company has been compensated by the high valuation making it not such a good buy especially in the context of the current stock market and economic conditions.It might be better to look at cheaper alternatives in the Indian Infra Sector.