PTC India Financial Services Ltd IPO Review (Apply)

Review By MLR Securities Private Ltd on March 17, 2011

Issue Date: Mar 16 - Mar 18
Price Band: Rs 26 - 28
Market Cap (Rs Cr): 1,461 - 1,574
Issue Size (Rs Cr): 407 - 439
Fresh Issue (Rs Cr): 332 - 357
Offer for Sale (Rs Cr): 76 - 82

Issue Objects

Augment capital base to meet the future capital requirements arising out of growth of business.

PTC India Financial Services (PFS) a non banking financial institution (NBFC) promoted by PTC India to make principal investments in, and provide financial solutions for companies with projects across the energy value chain. PFS provides both equity and debt financing including short term and long term debt including as well as structured debt financing. PFS also provides fee based financial services and financing against certified carbon credit emissions The company emissions. has been classified as Infrastructure Finance Company by RBI.

PTC currently holds 77.60% of equity share capital in PFS. GS Strategic Investments (an affiliate of The Goldman Sachs Group, Inc.) and Macquarie India Holdings (an affiliate of The Macquarie Group) each hold 11.20% of the company’s equity share capital.

1. Equity Investments - The focus of equity investment is in brown field & green field projects, backed by promoters with proven track record, good growth prospects and clearly defined exit routes. Their investment horizon tends to focus on the short to medium term. They also provide the last mile equity to power projects as and when required depending upon the project viability, its progress and their investment guidelines.

2. Lending - PFS offers debt assistance to projects subject to exposure limits stated earlier. PFS structures the debt assistance taking into consideration factors like needs of the borrowing entity, market conditions, regulatory requirements, risks and rewards from the projects. PFS provides debt assistance to projects in the entire energy value chain i.e. power projects, fuel sources, related infrastructure like gas pipelines, LNG terminals, ports, equipment manufacturers like transformers, conductors, insulators, cables etc; which are technically and economically viable.

3. Fee Based Services - PFS aspires to leverage its wide experience base in executing small and large offerings and the capacity to play the role of an advisor and arranger for power projects. With a core team of in-house power sector professionals, PFS strives to help its clients to become more competitive, effective and successful. PFS expects to build a formidable presence in the area of Finance Advisory and Funds Syndication in coming future.

4. Carbon Financing - PFS undertakes financing transactions through structured finance instruments tailor made to meet requirements of the projects PFS envisages a significant growth in emission reduction activities in projects. India and, hence, sees diversified opportunities in the Carbon Finance Business. In the next three years PFS proposes to build a portfolio of more than 3 million carbon credits.

Industry Scenario

The total energy consumption in India is estimated to grow from 566 Mtoe in 2006 to 1280 Mtoe in 2030. This implies growth at a CAGR of 3.5% CAGR in India's energy requirement over the next 25�]30 years and hence, there is a huge potential for investments in the energy sector in India.
According to the Integrated Energy Policy report dated August 2006 issued by the Planning Commission, India would require additional capacity of about 220�]233 gigawatt (“GW”) by 2012, 306�]337 GW by 2017 and 425�]488 GW by 2022, respectively, based on normative parameters in order to maintain a 8-9% GDP growth rate.
The total capacity addition during the past 25 years between the 6th and the 10th Five-Year Plans was approximately 91,000 MW. A total capacity addition of 78,700 MW is planned for the 11th Five-Year Plan which should result in significant investments in the power generation
The aim for the 11th Plan i.e. by 2012 is a capacity addition of 15,000 MW from renewables. By the end of the 11th Plan, renewable power capacity could be 25,000 MW in a total capacity of 2,00,000 MW accounting for 12.5% and contributing around 5% to the electricity mix. A capacity addition of around 30,000MW is envisaged for the 12th and 13th Plans.
Renewable power capacity by the end of the 13th plan period i.e. by 2022 is likely to reach 54,000 MW, comprising 40,000 MW wind power, 6,500 MW small hydro power and 7,500 MW biopower, which would correspond to a share of 5% in the then electricity-mix.

Valuations

The company’s market cap is coming to Rs 1,461-1574 Cr on an upper and lower price band of Rs 26-28. The company’s P/BV comes to 1.4 times its post issue book value of 18.2 on an upper price band of Rs 28. REC and PFC having exposure to power infrastructure financing are trading at a P/BV of 1.7 and 1.8 times their book values. Though PFS is not directly comparable to the REC and PFC considering their long standing experience in power financing and robust balance sheets, we believe valuations of PFS are at a discount as PFS also has significant equity investments in greenfield and brownfield projects which deserve a premium over book value. We recommend investors to subscribe the issue.

Financials (Rs in Cr)	FY09	FY10	9mFY11
Income from investments	10.3	21.3	14.1
Interest Income	0.4	27.5	57.9
Other Income	0.9	4.7	10.5
Total Income	11.6	53.5	82.6
Interest Expense & Fin Charges	-	11.6	28.6
Operating Expenses	2.9	5.1	4.0
Depreciation & Impairement of Fixed Assets	-	-	4.1
Total Provision/Write Offs	-	-	1.6
PBT	8.7	36.8	44.3
Tax	0.2	11.2	13.1
PAT	8.5	25.6	31.2
Net Worth	609.3	635.9	1,021.5*
Total Debt	20.0	310.8	477.4
Total Assets	630.2	959.0	1,525.0 *

Equity Investments

Currently 30% of company's Equity Investments have Buy Back arrangements with the promoters. The arrangements are at around 23.6% post tax annual returns. The promoters can Buy Back at the end of the third year. As the company had made these investments two years back management is expecting the Buy Back can happen in the next 10�]12 months.
For the balance 70% of the investments the company can exit through IPO. The company initially goes through SPV route. Under the agreement, if the promoters go for more than one project then the projects have to come through the same SPV or if they have more than one MLR Investment Research 2 16th March 2011 SPV for the project then PFS gets stake in the holding company which allows PFS to exit though IPO.
If the IPO doesn’t take place the promoters have the obligation either to buyback or PFS has the option to drag their shares along with the existing stake for a strategic sale.
As of Dec 31st, 2010 PFS has made principal investments in seven power generation projects of 3,221 MW capacity. Currently, 175.6 MW capacity is operational. Investments in greenfield projects represented 79.2% of the total principal investments most of which are in advance stages of development.
PFS had invested Rs 6 Cr in Indian Energy Exchange in 2006 for 26% stake. The company liquidated 5% of its investments in IEX for Rs 16 Cr. On the basis of this valuation the total stake of 21% at present in IEX is worth around Rs 55 Cr.

Debt Financing

As of December 31, 2010 PFS approved debt commitments of Rs 2,256 Cr to 31 companies having aggregate power generation capacity of 8,928 MW. Of these approved debt commitments PFS has entered into definitive agreements for financing Rs 1,112 Cr to 17 companies having total power capacity 8 283 MW PFS had outstanding loan financing of Rs 595 Cr to 13 companies 8,283 MW. with projects representing 6,794 MW of aggregate power generation capacity. Currently the company does not have any non performing assets.
The weighted average annual yield on the loans during Fiscal 2010 and the nine months ended December 31, 2010 was 19.02% and 15.74% respectively. Long term projects have net interest margin of 3%.

Major Debt Financing Projects of the Company

Debt Financing Projects	Capacity (MW)	Type of Loan	Term of Loan (Years)	Debt Commitment (Rs Cr)	Loan Amount Disbursed (Rs Cr)
Thermal Powertech Corp	1,320	Long Term	16	120	100
Konaseema Gas Power	445	Short Term	3	100	100
Athena chattisgarh Pvt Ltd	1,200	Short Term	1	90	90
Surana Power Ltd	420	Long Term	12	120	80
I Comm Tele Ltd	NA	Short Term	5	60	53
Bajaj Energy Private	450	Long Term	13	75	44
Jhajjar Power	1320	Long Term	12	32	32
OCL India	54	Long Term	10	39	30
Amreli Power Project	10	Long Term	10	17	16
A. A. Energy	10	Long Term	10	16	16
Total	5,229			670	560

Sources of Funding

PFS primary sources of funds include equity, term loans and non-convertible debentures ('NCDs'). PFS has issued secured NCDs on a private placement basis in October 2009 and February 2010. As of December 31, 2010, PFS had Rs 200 Cr in outstanding NCDs and Rs 277 Cr in other borrowings.
In October 2010, PFS entered into ECB agreement with Deutsche Investitions - UND Entwicklungsgesellschaft MBH ('DEG') for an aggregate amount of US$ 26.00 million (Rs 116 Cr) for on-lending to renewable energy projects.

Loans (Rs Cr)	As of 31st March	As of 31st March	As of 31st December
	2009	2009	2010
Secured redeemable NCDs	-	200	200
Secured term loan from banks (Including short erm loans)	20	111	277
Total	20	311	477

PFS extensively benefits from the power sector expertise, network and relationships of and its affiliates, which helps to assess the financing needs of power projects. Synergies with PTC India help PFS in sourcing deals as well as to understand and efficiently cater to the developers’ needs in a comprehensive manner.

Also, financing the projects where PTC is a power trader helps continuous monitoring of the project. Further, it benefits from brand association – PTC India is an established brand name in the Indian power sector. Additionally, key management personnel inducted in PFS have been associated with the power sector and have the ability to identify specific requirements of power project developers.

IFC Status – A Key Positive
PFS was granted IFC status in August 2010. We believe IFC status enhances the ability of PFS to raise funds on cost�]competitive basis and take higher debt exposure in power projects than other NBFC that have not been granted IFC status . As an IFC, PFS is entitled to lend up to 25% of MLR Investment Research 4 16th March 2011 its owned funds to a single borrower in the infrastructure sector, compared to 20% by other NBFCs that have not been granted IFC status. As an IFC, PFS is also eligible to raise ECBs upto 50% of the owned funds without prior RBI approval.

Efficient internal systems
PFS has laid down various systems and processes for project appraisal and monitoring. For instance, it has implemented the Advanced Internal Risk Scoring Model developed by ICRA Management Consulting Services Ltd for the assessment and mitigation of credit risk. These processes and systems include a detailed appraisal methodology, identification of risks and suitable structuring of credit risk mitigation measures. Further, it takes additional collaterals for weaker projects to protect itself from any deterioration in the asset quality including a recourse to promoters assets.

PTC India Financial Services Ltd IPO Review (Apply)

Issue Objects

Valuations

Equity Investments

Debt Financing

Major Debt Financing Projects of the Company

Sources of Funding

Positives

Concerns

Conclusion / Investment Strategy

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