FREE

PTC India's Q2FY20 results (Outperformer) - Disappointing volume growth;proposed regulation increases risk

Q2FY20 result highlights

• PTC reported trading volumes of 21.8BU, a decline of 1.5% yoy despite a 29% yoy growth in long term volume (includes medium term) and 8% yoy growth in cross border volumes. Short term volumes witnessed a decline (contributes to 44% of total volume) of 21% yoy to 9.6BU. H1FY20 volume grew by 6%
• Decline in Short term volume was led by 71% yoy decline in bilateral trades  to 1.7BU offset by the volume growth of 20% yoy to 8BU in Power exchanges volumes. Growth in long term volume was led by 1050MW wind PPA and 1.3GW of medium term PPA.
• Gross adjusted margin (excluding surcharge and rebate income) for Q2FY20 declined 13% to 3.6ps per Kwh (vs 4.1ps/kwh) whereas Gross margin (incl. surcharge and rebate) for the quarter was up by 12% yoy to 7.4ps per kWh (vs 6.6ps/kwh in Q2FY19). Gross margin was led by surcharge income of Rs557m during the quarter.
• As a result, reported PAT grew 41%yoy to Rs1.3bn (vs est. of Rs0.9bn) led by higher surcharge income and lower tax rate. PTC has opted for lower tax rate of 25.2% (earlier tax rate of 34%). During the quarter, it also received dividend from PFS of Rs330m (vsRs83m in Q2FY19)
• PTC Energy and PFS (65% stake) reported a profit of Rs590m in Q2FY19 (vs Rs600m) and Rs442m (Rs497m in Q2FY19) respectively. Consolidated PAT came in at Rs2.5bn (Rs1.2bn).

Key positives:   Effective tax rate of 25.2% (vs 34% earlier); signing PSA for Mangdechhu HEP (volume of 3BU with a 7ps/kwh margin)

Key negatives: Decline in adjusted gross margin by 0.53ps/Kwh; Draft regulations proposes 1ps/Kwh for back to back trading volumes

Impact on financials: Increase our earnings estimates for FY20E by 9% for increase in surcharge income in Q2FY20

Valuations & view

We believe PTC is attractively valued at 6x FY20E standalone earnings and 0.8x FY20E BV in view of 15% CAGR in long-term, cross border and medium term trading volumes which will lead to 15% core earnings growth over FY19-21E. In addition, we expect investments in PTC Energy/PFS to be monetised/divestment over the next few quarters. We reiterate our Outperformer rating. Slower-than-expected volume growth especially in short term and delay in value unlocking from investments is a key downside risk to our call.