The belief that PTC India Ltd’s trading volumes may be on a structural uptrend has proved short-lived. After rising 20% in the first half of the previous fiscal year, volumes plunged 17% in the March quarter. In the December quarter, they were down nearly 6%. The consecutive drop in quarterly volumes came as a negative surprise, triggering a sell-off in the stock.

New initiatives, the government’s focus on electricity sector reforms and strong volume growth in the first half of the previous fiscal year led to the belief that PTC India, a power trading company, may continue to maintain a positive momentum in volumes, a hope that drove the stock up 44% in 2014. But transmission grid constraints, an erratic merchant power market and subdued demand punctured this thesis.

Currently, PTC India depends on short-term trades for half of its trading volumes, says a note from ICICI Securities Ltd. The market for such transactions is weak, visible in the 2.6% drop in volumes on Indian Energy Exchange in the March quarter.

The situation may not improve quickly. Analysts fear ongoing sluggishness in industrial activity may continue to weigh on electricity demand, clouding volume outlook. “Declining short-term power volume is a concern and it could take some time to recover in our view, as the recovery of demand is linked to certain extent to the recovery in industrial demand, improvement of state electricity boards’ buying capacity and decongestion of some regional transmission infrastructure," Sharekhan Ltd said in a note.

The weak volume outlook has led to cuts in earnings estimates. To reduce the dependence on merchant power markets, PTC is trying to increase the share of long-term contracts, which offer steady revenue. As part of the plan, it has signed power purchase agreements (PPAs) for about 10,000 megawatts (MW), of which close to three-fourths are tied up. The balance 2,850MW remains untied, which is a challenge for now.

In the revised guidelines for a certain kind of power procurement process (case 1 bidding), the government excluded the power traders from participating in long-term power procurement bids. Analysts fear the guidelines can jeopardize PTC India’s signing of long-term power sale agreements, which can impact the earnings outlook. “This would negatively impact PTC as the company is yet to sign Power Sale Agreement for around 2,850MW of capacity for which PPA has already been signed. Factoring the same we have revised our FY16E and FY17E estimates downward," said the ICICI Securities note.

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