PTC Fin Service

PTC India Financial Services is entering the primary market on 16^th March 2011 with a fresh issue of 12.75 crore equity shares and an offer for sale of 2.92 crore equity shares of Rs. 10 each, both, in the price band of Rs. 26 to Rs. 28 per share, with retail investors getting a Re. 1 discount to the issue price. The company will raise Rs. 327-353 crore in fresh issue, while the offer for sale will range between Rs. 75-81 crore, depending on the price discovered. The issue, comprising 27.9% of the company's post issue paid-up capital, closes on 18^th March 2011.

77.60% subsidiary of PTC India with balance 22.40% held equally between Goldman Sachs and Macquarie Group, PTC India Financial Services provides project financing (both debt and equity) to the entire energy value chain (including power generation, transmission and distribution assets, gas pipelines, fuel linked ports, electricity equipment) in India. Presently focussed more on power generation projects, this non-deposit taking NBFC and Infrastructure Finance Company (as stipulated by RBI), also undertakes carbon credit financing against certified emissions reduction (CER), mainly for small Indian private power producers.

As of 31-12-10, company's equity investments aggregated to Rs. 419 crore comprising 8 companies, including minority stake in India's first power exchange, Indian Energy Exchange, while its debt investments stood at Rs. 595 crore (of which, 59% long-term debt) in 13 companies, representing projects with 6,794 MW of aggregate power generation capacity. Besides this, it owns 6MW wind farms in Karnataka which have recently got operational in the last 12 months.

The company has strong fundamentals as indicated by a CRAR of 60.57% against requirement of 15% and nil NPAs, as of 31-12-10. For FY10, it clocked total income of Rs. 53 crore and earned PAT of Rs. 25.5 crore, resulting in EPS of Rs. 0.59 on equity of Rs. 435 crore. For 9mFY11, total income rose to Rs. 83 crore (including Rs. 3.5 crore from sale of wind power) with PAT surging to Rs. 31 crore, translating into an EPS of Rs. 0.72.

The company's networth, as of 31-12-10, stood at Rs. 664 crore, while it had secured loans worth Rs. 477 crore outstanding, with total assets of Rs. 1,168 crore. Its return-on-assets (RoA) has also been improving from 3.2% in FY10 to 3.9% (annualised) for FY11.

PTC India Financial has an understanding with PTC Ashmore Fund to refer all Indian energy sector equity financing over Rs. 100 crore to the Fund, and in-turn will get reference for under-Rs. 100 crore equity financing opportunities as well as all debt and convertible debt financing opportunities from the Fund.

Company is undertaking the IPO to augment its capital base, which will help meet future capital requirements for growth. Also, its Rs. 100 crore retail infra bond issue is underway, which will boost further lending, besides significantly reducing cost of funds, which have, nevertheless been gradually decreasing from 11.86% in FY09 to 10.17% in 9mFY11, but still fares unfavourably vis-à-vis larger peers PFC and REC, which raise funds at average rate of 7-8%. Going forward, company's Infrastructure Finance Company status will also enable it to higher lending exposure to a single borrower group, quicker access to additional ECBs as well as easier bank financing.

PTC's holding in the company will drop to 60% post-IPO, while Macquarie Group, which will make a 20.5% CAGR in 3 years from selling part (60%) of its holding, will own 3.46% stake in the company, post-issue.

On a BVPS of Rs. 15.29, as of 31-12-10, company is offering shares in the IPO at PBV of 1.83x at the upper band of Rs. 28 and effective PBV of 1.77x for retail investors, on a pre-money basis. A broad comparison may be drawn with other power sector financiers:

^ FY11 annualised

* Assuming upper price band of Rs. 28

** On Post-money basis

Although PFC, REC and IDFC are much larger as against PTC India Financial, the latter has been showing handsome growth both in terms of fund deployment and on other financial parameters. PBV of the issue is very attractive vis-à-vis peers (excluding PFC which is lying low due to expected FPO) making a post-listing market cap of Rs.1,574 crore seems very fair, given the good fundamentals, experienced management team and healthy upside potential in India's power sector.

We recommend the issue and investors are advised to apply at the upper end of the price band.