PTC India: can strong volumes offset profitability concerns?
The recent spurt in prices and volumes in the spot electricity market has led to accelerated gains in the shares of PTC India Ltd. The stock has gained handsomely since the beginning of July.
The company provides power trading solutions. Last fiscal year (FY17), more than half of its volumes came from short-term trades having procurement duration of less than one day to a maximum of one year. So, firm merchant power markets should benefit PTC India. “Management stated that there has been a 64% increase in volume traded, while PTC India commands ~38% market share in the energy traded platform,” Sharekhan Ltd said in a note after interacting with the company’s management.
According to the broking firm, PTC India’s management expects merchant tariffs to stay elevated for a short period before cooling off to Rs3-4 per unit. As a result, Sharekhan has raised its volume assumption. The broking firm now expects the company’s volumes to grow by 15% in FY18 and 16% next year.
In FY17, total volumes, which include all types of trades, registered a growth of 14%.
Even if one brushes aside the recent spurt in merchant tariffs as a short-term phenomenon, there is no denying that the company is seeing an increase in volumes. Volumes in the quarter ended June were up 16%, driven by shorter- and longer-term trades. As Sharekhan points out, cross-border trades and the scheme for conducting competitive bidding for procurement of 1,000 megawatts power from wind power projects (where PTC India is selected as a trader) provide volume visibility.
While the commentary and volume growth projections should please investors, one has to see the kind of impact it will have on earnings.
Business from the spot power market carries lower margins. Further, core margins (margin per unit without rebate and surcharge) are already under pressure due to the changing volume mix. They are down almost 17% last quarter. As a consequence, the company missed first quarter earnings estimates of several analysts. “Adjusted for surcharge and rebate, recurring net profit fell 9% to Rs388 million, 19% below our estimates and well below the Street’s estimates,” Elara Securities (India) Pvt. Ltd said in a June quarter results review note last month.
With spot power markets expected to make significant contribution to PTC India’s volumes in the current quarter, pressure on core margins may well continue. But according to the Sharekhan report, PTC India’s management expects to maintain the margin profile despite a rise in traded volumes. A strong volume-led boost to overall earnings can help investors overcome margin concerns.
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