Power Trading Corporation (PTC) Investment Research Report

Value Investment Analysis Report

16^th December 2016
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Company Snapshot

PTC India Limited (PTC) is a holding company. The Company is engaged in the business of power and investment. It is involved in the trading of electricity and offers power trading solutions in India. Its segments include Power and Investment.

It offers business solutions for generators, utilities, cross border solutions, PTC retail, project financing, renewable energy, and energy efficiency and consultancy. It offers PTC retail solutions to public sector undertakings (PSUs) and Central PSUs, Corporates, Industrial Clients, Commercial Clients, and independent power producers (IPPs) and captive power produces (CPPs). It offers facilitation of power sale and purchase on power exchange, which include sale/purchase on day ahead market (DAM) and sale/purchase on term ahead market (TAM). It offers Long and Medium Term Sales, Short Term Sales and Power Banking Arrangements.

Through PTC India Financial Services Limited, it offers debt financing on non-recourse or on limited recourse basis.

Basic Filtering Criteria:

Picture shows Power Trading Corporation (PTC) Share's Market Snapshot

Critical prima-facie Observations of Power Trading Corporation Limited:

1.     PE Ratio: Power Trading Corporation (PTC)’s PE Ratio is 8.85 is well below the maximum permitted 15 and marginally lower than the Ideal for Indian conditions of 10 and therefore does not pose any hurdle.

2.     Price to Book Value Ratio: At 0.66 is real bonanza! It means that the nets assets (after deducting all liabilities) of PTC can still be bought at a discount of 34%!

3.     Distance from 52 week low: The current price of Rs.369.30 is 35.77% away from the 52 Week Low of Rs.56.05. On this parameter the scrip does not bestow any special benefit – at the same time it is not too unfavorable too.

4.     Dividend Yield: A dividend yield of 3.29% is decent.

In light of the above conditions, Power Trading Corporation (PTC) qualifies for further study. 

A. Company Performance

Profitability Analysis – Vis-à-vis our Small Gem from the power sector, SJVN Limited

Profit and Loss Account (Consolidated) (Rs. in Crores)	PTC                       2013-14	PTC                   2015-16	SJVN                     2015-16
Net sales	12099.08	13985.36	2499.99
Cost of sales:
Raw Materials/ Purchases	11001.37	12356.16	0.00
Changes in stocks of WIP & FG	17.73	0.00	0.00
Employee Benefit Expenses	24.64	36.92	220.81
Other expenses	232.10	227.49	230.81
Depreciation	8.54	10.09	677.51
Interest	223.70	532.78	209.47
Sub Total	11508.08	13163.44	1338.60
Operating profit after interest	591.00	821.92	1,161.39
Net of other non-operating income/expenses	44.23	52.90	409.93
Profit Before Tax	635.23	874.82	1571.32
Prior Period Items	0.43	-0.01	0.00
Exceptional Items	-4.29	37.53	0.00
Final PBT	639.09	837.30	1571.32
Provision for taxes	192.16	250.92	296.78
Profit After Tax (PAT)	446.93	586.38	1274.54
EBDITA (Operating Profits)	823.24	1364.79	2048.37
EBDITA (Operating Profits) %	6.80%	9.76%	81.94%
Depreciation	8.54	10.09	677.51
Interest	223.70	532.78	209.47
Interest Cost to Sales - %	1.85%	3.81%	8.38%
EBT	591.00	821.92	1161.39
EBT %	4.88%	5.88%	46.46%
Net Non-Operating Income	44.23	52.90	409.93
FINAL PBT	639.09	837.30	1,571.32
FINAL PBT %	5.28%	5.99%	62.85%
Provision for taxes	192.16	250.92	296.78
PAT	446.93	586.38	1274.54
PAT %	3.69%	4.19%	50.98%

Remarks:

1.     PTC’s EBDITA margin is poor compared to what SJVN is earning. It is quite understandable. While PTC is merely a trading company in power, SJVN is a major hydroelectric power producer.

2.     Interest cost as a percentage of sales of PTC has doubled since FY 2013-14. Why? Because PTC is unable to generate positive operating cash flows and hence is resorting to borrowing. If this trend continues, PTC’s meager profits will totally disappear.

3.     Net non-operating income constitutes just 7.48% of operating profits (EBT) compared to the 35.30% of SJVN, which means that company will NOT be able to maintain dividends if operating income is affected.

4.     PAT margins are humble compared to SJVN.

Power Trading Corporation Company Limited’s profitability ratios are poor not only in comparison but even on their own.    

Balance Sheet Analysis:

Balance Sheet (Consolidated) (Rs. in Crores)	PTC                 2013-14	PTC                 2015-16	SJVN               2015-16
LIABILITIES
Short-term borrowings	1417.30	1407.62	--
Sundry creditor (Trade)	1089.04	2010.12	17.44
Short Term provisions	101.67	149.67	386.21
Other Current Liabilities	221.44	765.88	513.53
Total Current Liabilities	2,829.45	4,333.29	917.18
Minority Interest	534.04	696.71	--
Term loans	2352.30	4997.66	2503.54
Deferred Payment Credits	18.51	--	--
Long Term Provisions	31.37	65.81	89.52
Total Term Liabilities	2,936.22	5,760.18	3,457.84
Total Outside Liabilities (TOL)	5,765.67	10,093.47	4,375.02
Ordinary share capital	296.01	296.01	4136.63
Reserves & Surplus	2612.94	3123.41	6920.64
Net Worth	2,908.95	3,419.42	11,057.27
TOTAL LIABILITIES	8,674.62	13,512.89	15,432.29
ASSETS
Cash and bank balances	616.78	221.98	3891.70
Investments	--	46.87	470.71
Receivables	2092.25	3227.87	1132.42
Inventory	--	--	38.65
Other current assets	460.73	836.18	334.63
Total Current Assets	3,216.63	4,756.74	5,397.40
Net Block	53.11	386.28	8833.18
Capital WIP	1.37	--	506.76
Total Fixed Assets	54.48	386.28	9339.94
Investments long-term	818.79	538.27	0.00
Long term Loans & Advances	4544.56	7788.76	210.71
Deferred Tax Asset	--	11.40	352.63
Other non-current assets	39.23	29.54	125.36
Total Other Non-Current Assets	5,402.58	8,367.97	688.70
Intangible assets	--	--	6.25
TOTAL ASSETS	8,674.62	13,512.89	15,432.29
Tangible Net Worth (TNW)	2,908.02	3,417.52	11,051.02
Current Ratio	1.14	1.10	5.88
Total Outside Liabilities/ Tangible Net Worth (TOL/ TNW)	1.98	2.95	0.40
Total Term Liabilities/Tangible Net Worth	1.01	1.69	0.31

Highlights:

1.     PTC has significantly higher borrowings than SJVN. Further PTC’s borrowings are increasing on the back of negative operating cash flows and this is dangerous for PTC.

2.     Current ratio of PTC at 1.1 as against minimum recommended 2 is poor and it has deteriorated from the previous 1.14.

3.     TOL/ TNW ratio of PTC is just below the stipulated maximum 3.

4.     Long-term Deb-Equity ratio is also significantly more than the recommended not more than 1.

Therefore on the balance sheet of PTC is week and deteriorating.

Cash Flow Analysis:

Power Trading Corporation Limited. Cash Flow Statement (Rs. in Crores)	PTC              2013-14	PTC               2015-16	SJVN              2015-16
Net Cash flows fom operating activities	-1849.18	-1246.42	2200.75
Net Investment in Fixed Assets	-8.60	-347.97	-753.97
Investment in subsidiaries			2.54
Sale/ (purchase) investments and deposits	-387.88	205.47
Interest dividend  income  income earned	36.25	34.97	277.55
Net Cash Flows from Investing activities	-360.23	-107.53	-473.88
Repayment of Borrowings		-185.73	-171.26
Interest and finance charges paid	-191.96	-472.40	-74.55
Proceeds from borrowings	2269.46	2047.94	76.75
Dividend including dividend tax	-65.92	-105.38	-523.68
Net Cash Flows from Financing Activities	2011.58	1284.43	-692.74
Net Increase/ Decrease in Cash for the year	-197.83	-69.52	1034.13

Highlights: 

PTC is generating negative cash flows from its operations. In order refill the leakage, it is resorting to borrowings both short-term as well as long-term, in turn pushing-up the interest costs. This is a vicious cycle. PTC also can do little, as it is merely a trading company with limited margins.

Even though the dividend yield is decent, PTC appears to be paying dividends out of borrowings since operating cash flows are negative.

On the cash flows front PTC’s performance is very poor.

Dividends

Distribution of net Profits

Let us study the dividend distribution pattern of PTC:

	Mar ' 16	Mar ' 15	Mar ' 14	Mar ' 13
Reported net profit (standalone)	233.61	203.10	251.23	128.74
Equity dividend	65.81	57.59	51.43	39.31
Dividend tax	8.19	7.53	7.77	8.05
Retained earnings	22.23%	19.45%	17.37%	13.28%

Company is striving to increase the percentage of net profits distributed as dividend.

So, on this count company performance is just all right, even though the possibility of sustaining dividends is looking doubtful in the face of negative operating cash flows, increased borrowings and borrowing costs.

Uninterrupted Dividend Payment History

Year	Dividend (% of Face Value of Share)
2016	25%
2015	22%
2014	20%
2013	16%
2012	15%
2011	15%
2010	12%
2009	12%
2008	10%
2007	10%
2006	10%
2005	8%
2004	8%

The above table shows uninterrupted dividend payment for the last 13 years.

On the uninterrupted dividends payment front Power Trading Corporation has an excellent track record.

Dividend Yield:

Dividend Yield is a combination of both the company’s dividend policy and performance as well as market condition. A dividend yield of 3.29% is decent, but this lower yield is partly on account of price rise of the share since August 2016 and modest profits of the company.

Five-year price graph:

Graph showing Power Trading Corporation (PTC) share price movement in the last five years

From the graph we can see that the market has been on a roller coaster ride. Since 21^st August 2015 the price has been climbing from Rs.52 to the present Rs.76.10, an increase of 27% in one year and three months.

In conclusion the five year price graph of Power Trading Corporation shows that presently the share is it’s 52 week high and therefore not any favourable condition.

Five years returns (price rise):

Table showing Power Trading Corporation (PTC) Share price return (rise) in the last five years

The five years return of PTC share of 77.60% indicates that the price of the share has appreciated significantly in the past five years. 

Therefore the market condition under this parameter too is not very favourable.

Final Conclusions:

1. The above brief analysis shows that Power Trading Corporation’s prospects are moderate. While there is plenty of scope for growth in sales the profits will always be limited on account of trading business model.
2. The EBDITA, EBT and PAT margins are modest to poor even though and the company is consistently profitable for many years into the past.
3. Balance sheet and all its ratios show weakness.
4. Borrowings and interest costs are increasing
5. Free cash flows are negative.
6. PE Ratio of 8.85 is in the comfort zone.
7. Price to Book Value Ratio (P2BV) of 0.66 gives a very attractive opportunity to buy the assets of the company at a discount of 34%.
8. The market condition parameters of five-year price graph and distance from 52 Week low and five year returns do not favour much.
9. Though the company is distributing a reasonably good proportion of the profits as dividends, the high market price has pulled down the dividend yield.

Final Investment Advice:

1. Power Trading Corporation has a disadvantageous trading business model that limits profitability.
2. Balance Sheet and Cash Flows show inherent weakness.
3. Price to Book Value is very attractive.
4. Unfortunately PTC cannot qualify to be included in a value investor’s portfolio.
5. Please DO NOT BUY the share.

Post Disclaimer: Opinions expressed here are the author’s personal opinions. Market conditions have a great bearing on many end results discussed in this report. No disrespect is intended towards the company, it’s management. Investors are advised not rely blindly on the opinions expressed herein but to exercise their own judgment. Neither the author nor the blog shall be responsible for any loss suffered by either acting or not acting based on the opinions expressed herein.

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