High growth, but not cheap

PTC India Financial Services (PFS) was incorporated in 2006 as a wholly-owned subsidiary of PTC India, a public sector unit and the country’s largest power trading company. PFS is engaged in the business of equity and debt financing, fee-based syndication, advisory services and carbon credit financing to power sector companies. PFS was also accorded the status of an Infrastructure Finance Company (IFC) by the Reserve Bank of India (RBI) in August 2010.

PFS is currently 77.6 per cent owned by PTC India; the latter’s stake will come down to around 60 per cent after the IPO. Institutional investors Goldman Sachs and Macquarie currently hold 11.2 per cent each in the company. The IPO entails a fresh issue of 127.5 million equity shares and an offer-for-sale of 29.2 million shares by Macquarie. The fresh offer will help PFS garner up to Rs 357 crore, which it plans to use to meet its future capital requirements.

On the business front, PFS’ strong parentage allows it quick access to potential business opportunities. It also benefits from the power sector expertise, network and relationships of PTC, enabling it to better identify the risks inherent in financing various projects. Its non-banking finance companies (NBFCs) and IFC status give it benefits in its operations, both while lending and raising capital. For instance, the IFC status allows it to raise funds (through ECBs and infrastructure bonds) at relatively low rates and have a higher debt exposure to individual companies/group vis-a-vis banks and NBFCs.
 

The flip side is, PFS’ relatively small balance sheet makes it vulnerable to intense competition from larger peers who have strong balance sheets and long list of clients. The company’s relatively high cost of funds (over 10 per cent) is also a concern. This, however, will be partly offset by its recently accorded IFC status. Currently, PFS is heavily dependent on PTC for its business growth. Also, as against its peers that have 10-15 per cent exposure via equity investments, PFS’ equity investments stand at 40 per cent. Since it focuses on smaller projects and given the nature of the business, any major delay in these projects could affect its financials.

Over 2008-2010, PFS’ total income and net profit have grown at a compounded rate of 313 per cent and 294 per cent, respectively. The company’s loan book has grown from Rs 20 crore in 2008-09 to Rs 595 crore for the nine months ended December 31.

In terms of valuations, at the upper price band of Rs 27 (taking into account the Re 1 discount to retail investors), PFS is valued at 1.46 times its estimated book value after offer. While there are no strict comparables, its very large peers, PFC and REC, are quoting at 1.8 times and 2 times their 2010-11 estimated book values, respectively. This translates into a 20-25 per cent discount. While the valuation discount is warranted, given the huge difference in financials, a lower pricing would have made the offer attractive. Lastly, given that PFS also has sizeable exposure to equity investments in various projects, which can be risky as well as rewarding, investors with a long-term horizon and appetite for risk can subscribe to this issue.