Safe exit for anchor investor!

OFFER AT A GLANCE
NAME	PTC INDIA FINANCIAL SERVICES LTD
OFFER QUANTITY	Public Issue of 15,67,00,000 Shares of Rs 10 each consisting of a fresh issue of 12,75,00,000 shares and an offer for sale of 2,92,00,000 shares.
% on TOTAL EQUITY	27.88%
OFFER AMOUNT	Rs 407 cr to Rs 439 cr.
OFFER PRICE	Rs 26 to 28
BID QUANTITY
OFFER OPENS	March 16, 2011
OFFER CLOSES	March 18, 2011
IPO RATING	CARE (4/5), ICRA (4/5) & CRISIL (3/5)
LEAD MANAGERS	SBI Capital, JM Financial, ICICI Sec & Almondz Global
REGISTRARS	Karvy Computershare

 

Parentage

The New Delhi-registered PTC India Financial Services Ltd (PIFS) is a Non-Deposit taking NBFC promoted in September 2006 by PTC India Ltd, formerly known as Power Trading Corporation of India (PTC) which was floated by leading PSUs viz. NTPC, Power Finance Corporation, Power Grid Corporation of India and NHPC.

While PTC India holds 77.6% in PIFS’ pre-issue Equity, GS Strategic Investments Ltd, an arm of Goldman Sachs, and Macquarie India Holdings, belonging to the Macquarie group, hold 11.2% each.

 

Business

PIFS has been set up as a Special Purpose Vehicle to provide financial services to entities in the Energy Value Chain. The financial services contemplated by PIFS include investing in Equity and/or Debt support to Power Projects in generation, transmission, distribution, fuel sources, fuel related infrastructure like gas pipelines, LNG terminals, Ports, Equipment manufacturers and EPC contractors. Besides, it is also envisaged to provide non-fund based financial services to entities in the Power Sector. 

 

Prospects 

In the Power Sector, the total capacity addition during the 25 years between the 6^th and 10^th Five Year Plan amounted to 91,000 MW. As against this, during the current 11^th Five Year Plan, planned addition to Power Generation Capacity was placed at 78,700 MW. This calls for investments worth Rs.9.3 trillion in Power Sector, which provides an excellent lending opportunity for PIFS.

However, the size of the opportunity must be seen in the light of the consistent failures of successive Governments to achieve the targeted addition to power generation capacity. For instance, during the 10^th Plan, as against a planned addition of 39,259 MW, the extent of actual addition amounted to only 21,095 MW, or only 53.7%. Similarly, in the period between April 2008 and Oct 2010, as against a planned addition of 63,344 MW, the actual investment amounted to only 29,322 MW, or just 46.3%.

Notwithstanding that the targeted addition may not eventually be achieved, the planned growth still provides an attractive opportunity for PIFS to grow and cross-sell a basket of products in sync with its promoter, PTC India.

Thus, leveraging on expertise and relationships of PTC India is likely to stand PIFS in good stead in the years to come.

 

Concerns 

• Possible over dependence on its Promoter, PTC India.

• Relatively higher cost of funds for PIFS as compared to Banks or Deposit-taking NBFCs as PIFS has not been permitted to accept deposits

• Concentration of Borrowers predominantly in Power Sector skews the sectoral weightage and opens PIFS to the risks affecting the sector

 

Anchor Investor-experience

Even though PIFS has been in operation for more than three years, its bottom line is too small to adequately service even the existing equity of Rs 435 cr. In other words the Anchor investors who had invested in the shares at 60% premium have not got any return on their investment even after three long years.

No wonder, Macquarie, which subscribed to PIFS’ equity in Jan 2008 and April 2008 at Rs.16 per share, is making an Offer for Sale of more than 50% of its holding! Macquarie stands to realize a minimum of Rs.75.92 cr through its Offer for Sale at the lower price band as against its investment of Rs.77.87 cr for the 4,86,66,667 shares.

This means that while Macquarie will nearly take away all the funds that it had originally invested in PIFS, it shall continue to hold 1,94,66,667 shares in the post-issue scenario at near-Zero cost!

 

VALUATION 

From a valuation perspective, PIFS’ offer price at the lower end of the price band discounted its FY 2010 EPS of Rs.0.59 and Book Value of Rs.14.60, 44 times and 1.8 times respectively. Based on the annualized figures of 9-month financial report card, the lower end of the price band discounts the EPS of Rs.0.96 and Book Value of Rs.15.32, 27 times and 1.7 times respectively.

Even though PIFS claims that they provide equity investment and financing solutions for the broader energy value chain and do not have any peer group listed companies in India to compare with, it is worth while to look at REC and PFC, which are in the listed domain, catering to the power sector. In fact, they present a more attractive investment proposition, as the following table bears out:

PTC INDIA FINANCIAL PEER GROUP COMPARISON
(Prices as on 14th March 2011)	M-CAP	P/R	P/E	P/BV	P/FV	PRICE
	(Rs Cr)	(x)	(x)	(x)	(x)	(Rs)
Power Finance Corporation	27604	2.9	10.8	2.0	24.1	240.50
Rural Electrification Corporation	22539	2.9	9.3	2.0	22.8	228.25
Infrastructure Development Finance Corp.	21298	5.1	17.6	2.3	14.6	145.80
INFRA-FINANCE COMPOSITE (5 cos)	75616	3.1	11.2	2.0	17.1
PTC India Financial    @ High Band	1217	11.1	29.2	1.8	2.8	28.00
@ Low Band	1130	10.3	27.2	1.7	2.6	26.00

 

Post-Listing Scenario

As the entire existing equity will be under a lock-in for a minimum period of one year, the anchor investors, who would hold 12.1% of the post-issue equity of Rs 562.08 cr at a cost much lower than the offer price, can not rush in to book profit immediately on listing. Nevertheless, no sooner the lock-in lapses, the scrip may encounter heavy selling pressure unless the company offers an attractive dividend yield.  

Thus, in the overall perspective, PIFS’ low post-issue market capitalization of less than Rs.1,600 Cr at the higher end of the price band in the infra-finance space is the only attraction left for retail investors to pitch for the issue!