Investor's Eye: Update - PTC India, Fertilisers; MF - Sharekhan's top equity mutual fund picks, Sharekhan's top SIP fund picks

 

Investor's Eye [October 10, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE PTC India Recommendation: Buy Price target: Rs65 Current market price: Rs55 Igniting positive triggers; price target revised up to Rs65 Key points Received long pending receivables from Uttar Pradesh SEB; reading through positive signals: The balance sheet of PTC India was adversely impacted for the past two years due to significant receivables pending from the state electricity boards (SEBs) of Uttar Pradesh and Tamil Nadu. Till Q1FY2014 the Outstanding receivables from both Uttar Pradesh and Tamil Nadu SEBs together were more than Rs1,000 crore. Recently, PTC India received its long pending principal due from Uttar Pradesh SEB worth Rs778 crore. From the received amount, more than Rs200 crore would be paid by PTC India to the power suppliers. Hence, on a net basis, it would receive above Rs500 crore. We expect a positive development on the pending receivables of around Rs300 crore from the SEB of Tamil Nadu soon. On this back drop, where these two sticky receivable accounts were hangover for the company for some time, impacting its returns ratio and valuations, the positive development could trigger a re-rating in the stock. Election year could boost power trading volumes in the near term, plus volume boost expected from commissioning of new plants over next one to two years: Generally during the election period, the SEBs tend to reduce or avoid load shedding and consequently the power trading volume picks up. We expect a similar trend in the coming quarters especially since many SEBs have returned to health after the tariff hikes and financial restructuring. Decent Q2 performance of financial service subsidiary, PFS: During Q2FY2014, PTC Financial Services (PFS) managed a healthy interest spread of 4.9%, which is a decline of 111 basis points year on year (YoY) but an increase of 27 basis points quarter on quarter (QoQ). It witnessed significant growth (66% YoY and 36% QoQ) in the loan disbursement to Rs550 crore. Consequently, the net interest income (NII) of PFS registered a growth of 30% YoY and 16% QoQ to Rs50 crore in Q2FY2014. While the loan asset and healthy yield helped for a better top line, a significant jump in the operating cost along with higher cost of funds limited the growth in earnings. On the asset quality front, it has nil net non-performing assets (NPA) as on September 2013. Disruption in Andhra Pradesh could hit volume adversely in Q3: On the negative side, the ongoing agitation-led disruption in the power generation and supply in Andhra Pradesh could impact the power trading volumes. Andhra Pradesh accounts for close to 10-12% of total trading volumes for PTC India.  Valuation-concerns easing out; re-rating on cards: PTC India witnessed a sharp de-rating in its valuation multiple due to issues surrounding the power sector and the built up of receivables from the SEBs (that have sucked out all the free cash from its books). However, we expect the improving receivable position and the near-term boost in the power trading volumes (in line with the historic trend in an election year) to significantly improve its financial performance and also lead to re-rating of its multiples. Moreover, the long-term growth outlook is also healthy given the expectations of close to 15% compounded annual growth in its trading volumes over the next three years (driven by commissioning of new power plants and supply from two power plants where its power purchase agreement was under dispute). Consequently, we retain our Buy rating on the stock with a revised price target of Rs65.   SECTOR UPDATE Fertilisers  Monthly sales marginally lower  Key points Lower imports of fertilisers (due to higher inventory) impacted total sales: The total sales of fertilisers have declined during September largely on account of lower imports of the non-urea fertilisers. The imports of non-urea fertilisers were restricted because of a huge inventory at the distributer level. However, the domestic production of urea and non-urea fertilisers has improved during the month. The aggregate sales of the fertilisers during September 2013 (by 15 leading manufacturers) have declined marginally by 5% as compared with the same period of the last year. YTD sales remain marginally lower: The total fertiliser sales declined by 1% on a year-till-date (YTD) basis as compared with the same period of the last year. The decline in the total fertiliser sales was on account of a steep decline in the sales of imported diammonium phosphate (DAP) and complex fertilisers. The decline in imports of fertiliser was largely on account of the high inventory levels of non-urea fertilisers in the market. The sales of DAP and complex fertilisers were lower by 1% and 1% respectively, whereas the sales of indigenous urea and muriate of potash (MOP) have witnessed a good improvement as compared with the same period of the last year. The growth in consumption of urea was largely on account of higher imports as compared with the same period of the last year. Performance of south-west monsoon till date (June 1 to October 2): India continues to receive excessive rainfall during this year's monsoon season (except east and north-east India). Out of the 36 meteorological sub-divisions, the rainfall has been excessive over 14 sub-divisions, normal over 16 sub-divisions and deficient over 6 sub-divisions (Arunachal Pradesh, Assam & Meghalaya, Nagaland, Manipur, Mizoram & Tripura, Jharkhand, Bihar, Haryana, Chandigarh and Delhi). In area-wise distribution, 86% area of the country received excess/normal rainfall while the remaining 14% area received deficient/scanty rainfall. Outlook: The above normal rainfall across the country and the decline in the inventory levels have increased the prospects of a revival in the demand, which has witnessed severe demand destruction last year due to a drought in the key crop growing areas. In the current kharif season, the high inventory levels in the system have restricted the imports of the complex fertilisers. However, going ahead, the good moisture in soil will result in robust sowing in the rabi season. Further decline in the inventory levels (back to normal level) will improve the demand for the urea and non-urea fertilisers. For a long-term perspective, we have a positive view on the fertiliser sector. However, any further cut in the subsidy in the next fiscal may remain an overhang on the sector. In the fertiliser space, we prefer stocks like Chambal Fertilisers, Coromandel International, Gujarat State Fertilizers and Chemicals (GSFC) and Rama Phosphate looking at the attractive valuation. 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Regards, The Sharekhan Research Team

 

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