Hefty gains from stellar recommendations of DD Sharma
First, we have to express gratitude to DD Sharma for generously sharing his stock tips for us.
We can see that he carefully hand-picks the stocks so as to ensure that our capital is safe and sound together with the chance of raking in hefty gains.
Some of his recent recommendations like Bhansali Engineering (BEPL), Ginni Filaments, Aditya Birla Money (AB Money), Kalyani Steel, Kridhan Infra etc are surging like rockets and showering massive gains on investors.
According to the opinion of leading experts which I have collated in my reports, these stocks have the potential to shower more gains.
PTC India, latest stock recommendation
Now, DD Sharma has homed in on PTC India, a small-cap (Rs. 3,400 crore) which is engaged in the unique activity of “power trading”.
Super blue-chip promoters
The first thing worth noting is that PTC India’s promoters are four venerable PSU companies being National Hydroelectric Power Corporation (NHPC), NTPC, Power Grid and Power Finance Corp.
This implies that our capital is safe and sound.
It is also notable that the promoters are themselves heavyweights in the power sector. They are probably customers and suppliers of PTC India and will ensure that there is no dearth of business for it.
High dividend yield
PTC India offers a dividend yield of 2.17% at the CMP of Rs. 115 which provides a cushion against the vagaries of the market.
Sustainable business model and “mouth watering valuations” will lead to multibagger gains
DD Sharma was his usual confident and articulate self as he made the following salient points on why PTC India must be given pride of place in our portfolios:
(i) In a growing economy, the demand for power will automatically translate into an increase in volumes for PTC India. The business is sustainable and scaleable;
(ii) For some mysterious reason, the stock price has not kept pace with the fundamentals of the Company. The stock was quoting at Rs. 145 in 2010 and it is still languishing in the same zone though there has been a quantum improvement in the fundamentals;
DD Sharma hinted that this aberration cannot continue for infinity and PTC India will soon be rewarded its true value;
(iii) PTC India has a turnover of about Rs. 15,000 crore with a PAT of Rs. 500 crore. It is an F&O stock. Such stocks normally command a premium;
(iv) The market cap of PTC India Financial Services, the subsidiary, is itself about Rs. 2600 crore. So, a market cap of only Rs. 3400 crore for PTC India is unreasonably low and unjustified because it ignores the stand-alone business and assets of the holding company;
(v) The stock is quoting at “mouth watering valuations” and the risk-reward ratio is heavily skewed in favour of reward.
(vi) DD Sharma opined that the stock would see a target price of Rs. 150 in 12 months. He also prophesized that the stock is likely to quote at a price of Rs. 500 in the next three years or so, leading to multibagger gains for investors who buy now.
PTC India has tremendous potential: SP Tulsian
SP Tulsian, the veteran stock picker, has endorsed PTC India as the ideal investment candidate.
He said that the “PTC India story is yet to unfold”.
He explained that several factors such as the consolidated earnings per share (EPS) of Rs 15, book value of 130 and the improvement on the power availability front with the DISCOM health improving mean that PTC India has tremendous potential.
|PTC INDIA LTD – KEY FUNDAMENTALS
|EPS – TTM
|LATEST DIVIDEND DATE
|14 SEP 2016
|BOOK VALUE / SHARE
[*C] Consolidated [*S] Standalone
|PTC INDIA LTD – FINANCIAL RESULTS
|PARTICULARS (Rs CR)
(Source: Business Standard)
Power demand showing signs of pick up; growth pattern to continue in FY18: CMD
Deepak Amitabh, the CMD of PTC India, confidently asserted that the growth pattern will continue in FY18 due to Ujwal DISCOM Assurance Yojana (UDAY) and the operalization of two power purchase agreements (PPAs) in Q4.
Core trading business likely to see strong traction: ICICI-Direct
ICICI-Direct has conducted a systematic analysis of the prospects of PTC India and opined as follows:
“Overall volumes to grow at CAGR of 15% over FY16-18E
PTC is India’s leading power trading company with a market share of 30% in the trading business. Its trading volumes and PAT have grown at a CAGR of 15.7% and 15.3% to Rs 3,714 crore and Rs 202.3 crore, respectively, over FY10-15. The company operates at a very small margin of 4–7 paise per unit. This exposes the company to the risk of receivables for its short term trade (currently accounts for 50% of its total trading volume), thus impacting its working capital cycle. While the company has committed to long term PPA of over ~ 11 GW capacities, it has signed a sale agreement (PSA) for only ~7.4 GW till FY15. PTC aims to bring down this gap and increase its long term PPA share in total volumes from the current 39% to over 45% by FY17E-FY18E, which would provide stable cash flow and, thus, minimise the risk of growing receivables. Going ahead, we have built in volume estimates of 4940 crore units and 5644 crore units in FY17E and FY18E, respectively. In terms of segmental break up, long term volumes are expected to grow at a CAGR of 24% over FY16-FY18E. With commissioning of PPAs in FY18E, long term volumes are expected to reach 2522 crore units from 1640 crore units in FY16.
Share of long term volumes to reach >45% by FY18E
Under the long term contract, PTC India expects total cumulative capacity of 5200 MW of capacity to get operationalised between FY17E and FY19E. The commissioning will be front loaded as FY17E and FY18E will see 2400 MW and 2180 MW of capacity coming on stream, respectively. The traction of long term capacity gaining traction is visible from FY16E itself as long term volumes formed ~39% of overall volumes while the share of the same was at 43% in Q3FY17.
Scaling up renewables exposure via PTC Energy
Out of total commitment of Rs 600 crore in PTC Energy, the company has invested Rs 581 crore as of 9MFY17. The subsidiary will spend the same to commission wind power capacity to the tune of 250 MW by FY17E, out of this 50 MW has been commissioned in FY16. However, if the returns from the projects are mediocre it would again impact return ratios negatively“.
Commissioning of new projects by suppliers in FY18 would drive volume growth: HDFC Sec
HDFC Sec has nicely summarized the pros and cons of PTC India.
• Power reforms and economic growth leading to higher trading volumes,
• Capacity commissioning over the next 2 years,
• Change in business mix to result in higher margins,
• Foray into renewable power generation,
• Robust growth in subsidiary – PFS,
• Slowdown in economy resulting in lower demand for power trading
• Increasing competition from power exchanges
• Deteriorating asset quality in subsidiary (PFS).
• Delay in capacity tie-up for onward sale
• High debtors compared to creditors
• Investments in subsidiaries and current investments pulling down return ratios
It is emphasized that the commissioning of new projects by the suppliers of PTC India in FY18 would drive volume growth for the company. The management expects contribution from long term trade to increase from 40% in FY15 to ~50% by FY17E and more beyond that resulting in better margins as LT trade margins are ~7 paise/unit as compared to ~4 paise/unit for ST trade.
HDFC Sec has also stated that it expects PTC to report robust sales growth of 13.8% CAGR over FY16-FY18E driven mainly by increasing volume. Further, PTC is setting up 350 MW wind power + solar power project project which is likely to earn 16% post-tax RoE as compared to 6-7% earned by the company on its regular trading business. Increasing business from Railways and Teesta Urja project going on stream in Q4FY17 are some additional triggers.
What about Adani Transmission?
At this stage, we must note that all the points made by the experts with regard to the demand for power etc also make Adani Transmission a good bet.
Mudar Patherya recommended Adani Transmission in January 2017. He has given ten convincing reasons why Adani Transmission is a good investment:
(i) Adani Transmission is the Power Grid of India’s private sector power transmission entity. It has achieved its 2020 capacity target three years ahead of schedule;
(ii) the returns on the assets — power transmission lines from one point to another — have been secured through long-term annuity revenue contracts with the government;
(iii) the business is marked by high profitability; the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin was 92 per cent in the first quarter of this financial year;
(iv) the moment the company stops expanding, it can select to patiently draw debt down and become a cash cow — or keep expanding capacity, with a relatively stretched but secured balance sheet (which is what it is doing);
(v) it has reconciled two business models, the pass-through where the government provides a pre-agreed return of 18 per cent internal rate of return (IRR) equity, with all costs reimbursed (five projects) and a tariff-based competitive bidding (TBCB) model, where the lowest cost company wins (nine projects);
(vi) the business is largely de-risked the moment a transmission network is activated — a high penalty for delaying or defaulting customers ensures timely inflow for Adani Transmission;
(vii) as the government graduates an increasing number of projects to TBCB, Adani Transmission expects to flex its muscle, using cutting-edge HVDC lines that deliver network availability much higher than the mandated average;
(viii) the company has graduated to investment-grade rating, making it possible to raise low-cost global funds (the second biggest profitability driver). The company’s 10-year $500 million bond offering attracted ~35,000 crore of borrowing interest, translating into a premium;
(ix) the company possesses deep competence through senior managers who, in their previous jobs, commissioned an aggregate 25,000 circuit km, providing Adani Transmission with rich intellectual capital (in land aggregation and right of way), making it possible to commission faster and cheaper (huge edge in a TBCB environment), leading to a 18-19 per cent equity IRR return, around 400 basis points higher than what is assured by the government;
(x) the company has demonstrated it can acquire transmission networks with speed, which has helped eliminate risk and prepone revenue inflow.
Adani Transmission has given 100% gain (in six months) since Mudar Patherya’s recommendation
Mudar Patherya’s timing was perfect. The stock has surged from Rs. 62 as on 20th January to the CMP of Rs. 125, putting hefty gains of 100% into the portfolios of its lucky investors.
If one goes by Mudar’s logic and investment rationale, more gains are likely to gush out of Adani Transmission sooner or later.
Billionaire Gautam Adani will make bucks for himself (and also for us)
It is notable that Billionaire Gautam Adani holds a stranglehold of 75% of Adani Transmission’s equity capital.
This is in contrast to Adani Ports and Adani Power where the shareholding of the promoters is not this high.
This implies that Gautam Adani has high(er) confidence in Adani Transmission and will ensure its prosperity.
Obviously, hanging on to the coat tails of such a visionary is not a bad idea at all from the perspective of novice investors.
Prima facie, it appears that the power sector offers the ideal balance of risk and reward and makes for a good investment. There is a wide array of stocks available from the private and public sector space, including PTC India and Adani Transmission, that we can choose from for our portfolios!