Power trader PTC India Ltd’s June quarter results have helped arrest the fall in its shares. The stock, which lost 20% in two months prior to the results announcement on 11 August, gained 10% in the last fortnight. The gains were driven by improving volumes, which grew 22% in April-June. In the previous three months they were up just 13%. What’s more, the momentum is likely to sustain over the next few quarters.

The management is confident of achieving 40 billion units or 14% higher trading volumes from the previous year in the current fiscal year. The business is expected to get a fillip from initiation of electricity supplies directly to end customers like Indian Railways and Delhi Metro Rail Corporation (DMRC).

“It (PTC) expects the domestic retail segment to grow manifold and its volume share to rise to around 10 billion units in the next three to four years against an overall volume of 35 billion units at the end of 2013-14," Sharekhan Ltd said in a note.

The company may also benefit from the government’s emphasis on achieving round-the-clock electricity supply. With several parts of the country still starved of electricity, analysts see a huge business opportunity for companies like PTC India if the government gets serious about achieving the target. “The company being the largest power trader in the country, with 50% market share, would be the largest beneficiary," Antique Stock Broking Ltd said in a note.

The broking firm estimates the PTC India’s trading volumes to double by 2016-17 fiscal-end. Many analysts agree that PTC India will register robust volumes in coming quarters. The challenge for the company, though, is to grow profitably and limit the volatility in earnings.

Currently less than a quarter of the traded volumes are sold through long-term power purchasing agreements (PPAs), which offer stable business and better margins. This exposes the company to the vagaries of the merchant power market, including risks like the rise in competition, price swings and demand suppression. To mitigate the risk, the company is planning to increase the share of long-term contracts in total volumes to 50% by end 2016-17.

The problem, however, is growing competition. As new capacities come on stream, electricity producers are looking to clinch long-term PPAs directly instead of going through intermediaries like PTC India. This is raising concerns about the company’s ability to achieve the stated target in stipulated time. “PTC’s business model (especially long-term PPAs) is essentially receivables discounting along with minimum guarantee in tariffs to developers. With PPA revised to 11GW (gigawatt) from 14.4GW earlier point out that the risk is materializing," Emkay Global Financial Services Ltd said. So while the business outlook is improving, the challenge of increasing the long-term volumes in total trading remains.

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