Exercising its powers under the Electricity Act 2003, the Central Electricity Regulatory Commission (CERC) has issued new regulations fixing trading margins for inter-state trading in electricity. Since PTC India Ltd is a market leader in this business, it will be a major beneficiary of the new regulations.
Trading margins would not exceed 4 paise a unit if the selling price of electricity is less than or equal to Rs3 a unit. The ceiling of the trading margin shall be 7p a unit if the selling price of electricity exceeds Rs3 a unit. The 4p a unit cap regime was not adequate to cover the operational and market risks borne by trading companies due to strong competitive pressures, especially in the short-term buy and sell agreements. This regulation will help the growth of the power trading industry.
During FY09, short-term trading (STT) constituted 47% of the total power traded by the PTC. The new trading margin regulations will have a positive impact on PTC’s profit as the company generates higher volumes through short-term trading (where the margin was earlier capped at 4p a unit). We expect the net profit to increase by Rs29.9 crore in FY11 estimates and by Rs45.7crore in FY12 estimates, on account of the new regulations.
Some of the main features of the new regulations are: The trading margins would apply only to short-term buy-sell contracts for inter-state trading and shall not exceed 4p a unit if the selling price of electricity is less than or equal to Rs3 a unit. The ceiling of trading margin shall be 7p a unit in case the selling price of electricity exceeds Rs3 a unit.
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If more than one trading licensees are involved in a chain of transactions, the ceiling on the trading margin shall include the margins charged by all the traders put together. In other words, traders can’t circumvent the ceiling by routing electricity through multiple transactions.
The new ceiling rates on the trading margin would come into force after one month so that the existing contracts can be re-aligned by the parties, if required. Long-term agreements have been exempted from trading margins to facilitate innovative products and contracts for new capacity addition, involving higher transaction risk. Also, the trading margin on long-term contracts was not consistent with the tariff-based competitive bidding guidelines, which envisage the discovery of electricity prices through competition among suppliers.
According to CERC guidelines issued in May 2006, the margins for inter-state power trading are capped at 4p a unit of power traded. Total power trading volume in the past five years have increased at a compounded annual growth rate (CAGR) of 17%. The entry of new players in the power trading business affected PTC’s volume, resulting in steep erosion of the company’s market share (to 46%).
As of FY09-end, there were 13 trading licensees (increased from nine in FY07). PTC has the greatest reach in the Indian power trading market and is also the market leader. The short-term trading solution forms a major part of PTC’s trading portfolio at present with its transactions covering almost all state electricity utilities in the country.
Outlook and valuation
We believe that PTC’s emphasis on the long-term trading (LTT) segment will help it sustain high growth. In FY09, STT constituted 47% of the total power traded by the company. It proposes to increase its power trading mix to 70:30 in favour of LTT. PTC’s increased focus on LTT is expected to provide consistent cash flows compared to STT as the number of units generated is expected to be uniform, resulting in reduced volatility.
The company has already signed a power purchase agreement and a memorandum of understanding for purchasing 16,313MW and 18,290MW of power, respectively. The establishment of subsidiaries with the prime object of investment in power projects is also expected to help PTC acquire a stake in additional projects. The strategic initiatives taken by PTC are expected to catapult it from being a mere short-term energy trader to an integrated energy player.
We expect PTC to post a CAGR of 28% over FY09-12 estimates, following the commissioning of new power projects. We estimate the company’s profit to post a CAGR of 28.3% over FY09-12 estimates. We have revised our profit after tax estimates from Rs119 crore to Rs148.9 crore for FY11 estimates, and from Rs146 crore to Rs191.7 crore for FY12 estimates. Accordingly, we have revised our earnings per share estimates from Rs4 to Rs5.1 in FY11 estimates, and from Rs5 to Rs6.5 for FY12 estimates. We maintain our accumulate recommendation on the stock.
Photo by Ramesh Pathania and Graphics by Ahment Raza Khan/Mint