PTC India Financial Services

Background:

PTC India Financial Services (PFS) has been promoted by PTC India Ltd and registered with RBI as an NBFC. It is a systemically important non-deposit taking NBFC classified as “Infrastructure Finance Company” by RBI.

PFS is engaged in the business of making investments in, and providing financing solutions to companies with projects in the power sector and related areas across the entire energy value chain.
 

Indian Power Sector:

Let’s first take stock of Power sector in the country. Indians consume 900 kilowatt hours (kWh) per capita electricity compared to 7,000 kWh per capita in Europe and 14,000 kWh in the US. Bain & Co. projects power generation capacity to grow from about 225 GW in 2013 to 700 GW by 2032 in India. The Modi government’s goal of adding 175 GW (~100GW in Solar & ~60GW in Wind) of Renewables by 2022 underpins the transformation of power sector in the country. This expansion would require investments of around USD 200 bn.

Access to domestic financing is a key challenge for power sector due to the weak financial footing of the industry which has left the relatively small Indian domestic banking sector carrying an estimated US$100bn in loans to just 10 of the larger power and infrastructure conglomerates. A power generator would need access to long term capital to commission the plant successfully.

State distribution companies (DISCOMS) have been suffering large losses across the distribution system, for both technical and commercial reasons. Electricity grids in developed markets expect losses below 15%, but losses by India’s state utilities is as high as 30%—equal to about 1.5% of the country’s GDP. About one-third of that loss is technical, but the rest is either given away for free or with high subsidies to farmers, or lost to pilferage. UDAY is a shot in the arm to improve the State DISCOMS financial health by transferring their liabilities to the books of State governments.

Earlier government’s focus was only on power generation; now govt. is actively pursuing efficiency measures both at supply and demand side. Transmission specifically has started attracting private capital due to annuity based returns.  Rationalization of Tariff policy is another key measure being undertaken.  

Business Analysis:

PFS is mainly lending to mid size power projects by leveraging its parent’s reach in the power sector. PFS has exposure to Thermal, power, solar, wind and other economic infrastructure. The loan book has grown at CAGR of 66% since 2011. Management has opined, during investor call, that while they expect a growth of average 30%, they wouldn’t be guided by a number.  

The sanctioned book indicates to an interesting story. While thermal projects’ sanctions have remained constant over last 1 year, the Renewable component is now more than half of total sanctions. PFS is focusing on sanctioning more loans for Renewable projects going forward.

The ‘Others’ portion include economic infrastructure including last mile road connectivity, mining & port expansion in addition to energy value chain. This diversification seems to be driven by pressure on Yield in Renewable projects.

The profits have grown at CAGR of more than 50% since 2011. FY2016 numbers include an extra-ordinary income of INR 206 cr from equity sale of a project.

The spread has been on the downward trend over last 1 year due to substantial pressure on yields. This is due to increased competition from banks in Renewable space.

 

	Q4-2015	Q1-2016	Q2-2016	Q3-2016	Q402016
Yield	13.46	13.88	12.62	12.96	12.82
Cost of Funds	9.3	9.3	9.05	8.84	8.95
NIM	6.03	6.47	5.58	6.12	5.76
Spread	4.15	4.58	3.57	4.12	3.88



  

Impact of Low Bids for Solar Power:

PFS currently doesn’t have exposure to any Solar project where the bid has been below Rs. 6.5 per unit. PFS would however not feel uncomfortable just because Solar bids are at lower levels. It would primarily affect the IRR of the project. A promoter may be happy to live with lower IRR if there are certainties in the project – PPA has been signed or evacuation infra is in place. Some of the world’s large companies may sustain businesses at lower bids by leveraging economies of scale & reducing expenses in procurement of panels, batteries etc.

Business risks:

While the business growth looks attractive, it has inherent risks which an investor needs to understand before investing.

1. Counterparty risk: The project where the power is purchased by State DISCOMS, power generator may be exposed to significant delay in payments or cancellation of PPAs. This is due to the precarious financial conditions of such DISCOMS. Ms. Jayalalithaa, the CM of Tamilnadu promised free electricity in her election manifesto, which may increase pressure on state DISCOM to effectively settle its dues with power generators. UDAY is expected to address this risk going forward.   

2. Evacuation / Grid risk: The power plant may be completed in time, but ancillary infrastructure may not be in place for the transmission of power. Many Wind power farms and Solar farms are being set up in far flung place where land is cheap and are blessed with good sunshine & Wind but the transmission infra may need huge investments.

Asset Quality:

The asset quality of PFS has come under pressure over last few quarters. The Gross NPA stand at Rs. 293 cr (3.4%) while Net NPA (2.35%) at Rs. 200 cr at FY2016 end. Three major projects classified under NPA are Surana Power (84 cr exposure net of provisioning), Konaseema (76 cr net of provisioning) and Icomm (Rs. 28 cr net of exposure). Another ~12 cr NPA is a renewable project in Tamilnadu which has started servicing debt and is expected to be classified as standard asset soon.

Konaseema gas power plant based in Andhra Pradesh is ready but is not operational due to non availability of gas. PFS expects them to soon get access to gas supply. While Surana Power was at advanced stage; developer was not able to bring his equity as cost-run happened. The lead banker - Axis Bank took control over the project and currently assessing the project value to sell it.  

Restructured assets comprises of a total of Rs. 430 crore. These assets comprise of DCCO (date of commencement of commercial operation) projects, wherein RBI have allowed the Thermal power projects which have yet not commissioned till date, a time period of 2 more years before treating them as restructured. PFS is not required to provide provisioning for these delayed projects, but PFS on a conservative estimate has provided for these projects.

Financial Analysis:

Asset Liability Management:

The interest mismatch risk is low as maturities liability and asset book are line with each other.

Maturity* profile (INR cr)	Upto 1 year	1- 3 years	3-5 years	Above 5 years	Total
Liability	1345	797	995	1971	5110
Asset	903	1149	976	3572	6602

        *FY2015

Leverage & capital adequacy:

Debt to equity of PFS stands at 3.93 at FY2016 end. The capital adequacy stands at 21.82% against RBI requirement of 15%.  As the power plants are commissioned and run for a year, the risk weight could be reduced to 50% leading to reduced capital requirement. Management has provided guidance of raising Rs. 750 cr equity in a phased manner. This will be done to support the increasing loan book and increase per borrower and per group lending cap. The access to capital shouldn’t be a problem given its quasi-PSU position and support from the parent.

Cost Optimization:

The operating cost to income is one of the lowest at ~7%. Unlike a consumer financing NBFC, wholesale financing NBFC doesn’t need huge branch network and workforce.

Shareholding pattern:

PTC India Ltd. is the majority shareholder at 60% as on March 31, 2016. Around 7% is held by institutional investors and rest ~22.5% is free with individual shareholders.

 Management Analysis:

Two key resources for a financial organization are its capital and people. PFS management has long drawn experience in power sector.

Deepak Amitabh- Chairman:  Mr. Deepak is an alumnus of St. Stephen's college, Delhi. He belongs to 1984 batch of Indian Revenue Service (IRS) & has more than 30 years of work experience in audit, finance and resource mobilization. He played a key role in formation of PTC India Financial Services Ltd. (PFS).

Dr. Ashok Haldia- MD & CEO:  Dr. Haldia served as a Secretary of Institute of Chartered Accountants of India, New Delhi for about a decade. He is a Member of the Institute of Chartered Accountants of India, Institute of Company Secretaries of India and the Institute of Cost and Works Accountants of India.

Dr. Pawan Singh- CFO: Dr. Singh has more than 29 years of experience in financing including infrastructure finance.

PFS management draws experience from institutions like PTC India, IIFCL, SIDBI, NTPC, Power Grid, Railways, Tata Steel, Civil Services etc. This wide experience equips the management with necessary skillsets to analyze the infrastructure financing proposals.

Sources of Moat:

Does PFS have a moat in its business? Let’s analyze the 3 key sources of moat

1. Supply Side Advantage: Does PFS have any propriety technique to better analyze the lending proposals? Or does it have access to funding at cheaper rates than other competitors? Management has years of experience evaluating infra projects. However, it wouldn’t sustain for long as the process may get commoditized soon. This is what happened to banking products. PFS certainly doesn’t have access to cheaper funds.

2. Local Economies of Scale: Economies of scale is not a proper scale to evaluate moat for a wholesale lending financial organization.

3. Demand Side Advantages: PFS doesn’t seem to have any demand side advantages and clients would approach multiple lending firms for financing. PFS may not have captive customers.

The biggest moat of a financing firm is its management & employees. PFS top management includes quite a few bureaucrats. Bureaucracy is perceived to be painstakingly slow and bureaucrats highly corrupt in our country. However, it would be far from truth if we paint all bureaucracy from the same brush. PFS management has not taken any step which would adversely affect the rights of minority shareholders. They have managed the balance sheet in fairly effective way so far.

Conclusion:

India is considered to be a consumption led growth story; infrastructure has always been a laggard. Present government is focusing on infra space which is expected to yield results in near future. PFS is uniquely positioned to act as a catalyst to support this infra story, however risks of long term financing remain as relevant today as during any other period.  

PFS should do well if management can keep a clean balance sheet.  Another key task for management would be to efficiently utilize the additional capital to be raised by deploying it at better yields. This would create significant value for the shareholders.

Disclaimer:

All data has been taken from public resources. I'm currently invested in PFS. I may or may not invest in future. An investor should do her own analysis before making an investment decision. The views expressed are personal and doesn't represent that of my employer's. 

This article is just a collection of my thoughts about the company.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations.


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