PTC India Financial Services catch it young

Transcription

1 PTC India Financial Services catch it young PTC India Financial Services (PFS) is a systemically important non deposit taking NBFC, promoted by PTC India Ltd (PTC). The company is primarily engaged in equity investment as well as debt financing to projects across the energy value chain in India. PFS raised `3.57 bn through an IPO by offering mn equity in March However, the stock got badly hammered post its listing owing to various concerns in the power sector. However, we believe PFS s equity investments and loan disbursements to power projects is comfortably placed in terms of fuel sourcing, regulatory approvals, etc. We believe at current valuation the stock looks attractive. We initiate coverage on PFS with a BUY rating and a price target of ` 25.7 /share, implying an upside potential of 45.4% from current levels. Investment Arguments Rating CMP Target Upside % BUY Source: NSE, ABML Research Risk Return Matrix Return Low Medium High Low Medium High Risk Equity investments Main value driver with well structured exits and committed IRRs PFS has a unique business model as in addition to loan financing to power companies, it also makes strategic equity investment in companies in the energy value chain in India. As of March 31, 2011, the company s equity investments aggregated `4.59 bn in eight companies. We believe that the company has protected its rights well with committed IRRs (~21.0% to 23.75%) and well structured exits. Added to this, the company s representation on numerous boards enables them to get clear understanding of the ground level realities and operational issues. We expect PFS s equity book to grow to ` 7.33 bn by FY14E. Loan financing book to grow with increasing leverage - Margins and return ratios to stabilize going forward PFS is involved in providing debt financing as well as structured debt financing. Currently the company s loan financing book is very small mainly due to lower leverage of ~1.0x (calculated post deducting equity investment from net worth). However, the equity raising initiative by the company recently through an initial public offer will provide enough room to increase its leverage, which will drive the growth in loan book going forward. We expect the loan book to grow at a CAGR of ~75.9% (on lower base) over FY11-14E from `6.76 bn currently to `36.77 bn with leverage increasing from the current 1.0x to 4.9x by FY14E. Borrowing profile to get diversified - IFC status to enhance the company s ability to raise funds on cost-competitive basis Currently, the company s borrowing profile is less diversified with NCDs and bank term loans constituting 58.0% and 42.0% respectively as of December 31, However, going forward the management has indicated that the company will explore various other avenues of raising funds and make its borrowing profile more broad based. In light of this, in Q4 FY11 the company has raised ~`0.42 bn through issuance of long term infrastructure bonds and is likely to raise funds through ECBs (agreement with DEG already in place) in the current quarter. The management expects share of bank borrowing to come down going forward to ~20.0% by FY14E, while NCDs, ECBs and infrastructure bonds are likely to constitute around 40.0%, 30.0% and 10.5% respectively. PFS was granted IFC status in August 2010 thereby enhancing its ability to raise funds on cost-competitive basis. Valuation: We have valued PFS in two parts i.e. equity investment book and loan financing book separately. For valuing the equity investments, we have assumed base case post tax equity IRR of 18% and cost of equity of 14%, to arrive at the multiple of 1.54 x to its current equity investment book of ~4.59 bn. Applying this derived multiple to FY14E equity investment book of ~7.33 bn and discounting it at FY12, gives us a value of `15.4 / share. The loan financing book is valued at 1.1x its FY12E book value of ` 5.25 bn, thus giving us a fair value of `5.77 bn or ` 10.3 / share. This gives us the fair value for both the business at 25.7/share in the base case scenario, implying an upside potential of 45.4% from current levels. Source: ABML Research Company Data BSE Code NSE Code PFS Equity Capital (` mn) Face Value (`) 10.0 Market Cap (` bn) 9.92 Avg Daily Volume (since listing) week H/L (`) 28.0 / 17.0 Source: NSE, BSE Shareholding (%) Holders Mar Mar 11 Dec 10 Promoters FIIs MFs/Banks & FI s Public & Others Source: BSE Chart: PFS vs. Sensex Relative Performance Mar Apr Apr Apr May May May May May-11 PFS Return Sensex Return Source: Capitaline Analyst Details Sumit Jatia sumit.jatia@adityabirla.com Financial Snapshot (` mn) In ` mn NII YoY (%) Operating Profit YoY (%) Net Profit YoY (%) NIM (%) FY FY11E FY12E FY13E Source: ABML Research, company data EPS (`) YoY (%) BV (`) RoAE (%) RoAA (%) P/E (x) P/BV (x) Page No. 1

2 Industry Overview Overview of the Indian Power Sector The Indian power sector has the fifth largest electricity generation capacity in the world and the world s third largest transmission and distribution network. Over the last few years, although power generation capacity has increased substantially, it has not kept pace with the continued growth of the Indian economy, despite low per capita electricity consumption. India has continuously experienced shortages in energy and peak power requirements. According to the Central Electricity Authority, the total energy deficit and peak power deficit for March 2011 was approximately 7.5% and 10.3%, respectively. Power Demand in India Rapid growth of the economy places a heavy demand on electric power. Reforms in the power sector, to make it efficient and more competitive, have been under way for several years and while there has been some progress, shortage of power and lack of access continues to be a major constraint on economic growth. The persistent shortages of electricity both for peak power and for energy indicate the need for improving performance of the power sector in the country. As set forth below, per capita consumption of power in India remains relatively low compared to other major economies Chart 1: Per Capita Electricity Consumption (kwh) in 2008 India 566 Japan 8072 China 2453 USA OECD 8486 World Average 2782 Table 1: Power Demand-Supply Overview Source: IEA, key world energy statistics, 2010, ABML Research The low per capita consumption of electricity in India compared to the world average presents significant potential for sustainable growth in the demand for electric power in India. Demand-Supply Imbalance in India The Indian power sector has historically been weighed down by energy shortages which have been rising over the years. The demand for electricity has consistently exceeded the supply, and the demand-supply gap has been widening. The following table provides the peak and normative shortages of power in India Period Peak Demand (MW) Peak Met (MW) Peak Deficit/ Surplus (MW) Peak Deficit/ Surplus (%) Power Requirement (MU) Power Availability (MU) Power Deficit/ Surplus (MU) Power Deficit/ Surplus (%) Fiscal ,492 71,547-9, , ,890-48, Fiscal ,574 75,066-9, , ,398-39, Fiscal ,906 77,652-10, , ,115-43, Fiscal ,255 81,792-11, , ,819-52, Fiscal ,715 86,818-13, , ,495-66, Fiscal ,866 90,793-18, , ,007-73, Fiscal ,809 96,685-13, , ,021-85, Fiscal , ,009-15, , ,644-83, April-December , ,286-12, , ,225-55, December , ,060-12, ,363 65,529-5, Source: PFC - RHP, ABML Research Page No. 2

3 Huge potential for investments in the energy sector A tentative capacity addition of approximately 100,000 MW has been envisaged for the 12th Plan. This comprises an estimated 74,000 MW thermal power, 20,000 MW hydro power, 3,400 MW nuclear power and 2,500 MW from lignite, respectively. The total fund requirement to achieve the above targeted capacity addition is estimated at ` 11.0 tn with an estimated ` 4,950.0 bn, bn & bn for generation, transmission and distribution projects. This reflects the huge potential for financing and investments in the energy sector. Government Initiatives to boost the power sector The government has initiated several proactive steps to open the sector for the private players and realize its full potential - Introduction of the Electricity Act 2003 and the notification of the National Electricity Policy Constitution of Independent State Electricity Regulatory Commissions in the states. Providing income tax holiday for a block of 10 years in the first 15 years of operation and waiver of capital goods' import duties on mega power projects (above 1,000 MW generation capacity). 100% FDI permitted under the automatic route for generation and transmission of electric energy produced in hydro-electric, coal/lignite-based thermal plants, oil-based thermal plants and gas-based thermal plants; non-conventional energy generation and distribution, distribution of electric energy to households, industrial commercial and other users; and power trading. The government has also taken up some ambitious programmes like the Ultra Mega Power Projects (UMPP), Rajiv Gandhi Grameen Vidhyutikaran Yojana (RGGVY), Accelerated Rural Electrification Programme and the goal of Power for All by 2012 among others, to rapidly increase the installed capacity. Sector currently beleaguering with various concerns; however we believe these concerns would be addressed through appropriate policy intervention Over the last few months, power sector is plagued by various concerns related to environmental clearance, fuel security and linkages, long term PPA s, overall timely execution of the projects and worsening financial health of state electricity boards (SEBs). The discussion is going on between the power ministry, planning commission & coal ministry to make more coal available to such projects(especially the inland projects, where inland transportation of the coal is not feasible). India has seen huge investments (`10.3 tn allocated for power sector in 11 th plan) in the sector over the last five years. The demand for power is growing and the scope for the growth of this sector is immense given the current penetration levels. Power being a critical sector for economic development and sustenance of growth of India s GDP and having serious ramifications for the stability of the financial system, we believe these are definite concerns but would be addressed through appropriate policy actions. Our take: Demand for power and growth of the sector is a secular multi year theme given the lower penetration and lower per capita cosumption ( we are ~80% below the world average). With structural rise in coal prices, alternate energy (renewables) would attract capex and would eventually bring the capital cost down, which in turn would lead to more such projects. With Investments and focus on nuclear energy reducing and getting deferred, the focus on others would have to increase, providing huge opportunity in water, wind and solar energy. However, thermal is likely to remain the dominant force over the next decade. Pit head and proximity to port is preferred over others given the shortages through the linkage route. Therefore financiers and investors would be tested over the next few years over their due diligence and foresight. Nevertheless, given the concerns, the opportunities are huge for finaciers of equity & debt across the sector. PFS is a young company purely focussed in this space with reasonable diversification of its portfolio. PFS is promoted by PTC who s very basis of existence (the business model) is to remove the counter party risk for the manufacturer. This provides PFS a wonderful platform within the group to grow the financing portfolio (it is the only arm within the group for debt financing refer diagram below). The existence of PTC also reduces the likely delinquency rate relatively due to existence of an off-take arrangement, etc. Page No. 3

4 Group Structure PTC India Subsidiaries 60% stake (Post IPO) PTC India Financial Services 100% stake PTC Energy Debt financing & financial investors (equity investments) with investment horizon of 3-5 years Undertakes co-development of energy projects with private project developers / Asset ownership with a long term view Broad understanding for business proposals within the group PTC India Financial Services Income Avenues Debt Financing Sole financing vehicle within the group Equity Investment Business Proposals Alternate Financing / Fee Income CER financing etc. Investment >100 crs PTC Ashmore 1 Investment <100 crs Only domain of PFS Renewable JV with Sovereign Fund 2 Non Renewable PFS on its Book Note: 1) Agreement between PTC India and Ashmore group to establish an Energy Sector Fund (PTC Ashmore Fund). PFS have inprinciple agreed to enter into a definitive cooperation agreement with the PTC Ashmore Fund under which it will refer all energy sector equity financing opportunities in India in excess of ` 1.0 bn to the PTC Ashmore Fund, while the PTC Ashmore Fund shall refer to PFS all equity financing opportunities of a value of ` 1.0 bn or lower. Both the parties will have the first right to refusal. 2) PFS is exploring joint venture opportunities for the establishment of a fund focused on renewable energy. Page No. 4

5 Investment Arguments: Equity investments Main value driver, well structured and adequately protected PFS has a unique business model as in addition to loan financing to power companies, it also makes strategic equity investment in companies in the energy value chain in India. The equity investments are mostly financial investments made in early stage of the project. The company s current portfolio of equity investments primarily includes greenfield projects which typically involves between two to five years of development activity prior to commencement of commercial operations. As of March 31, 2011, the company s equity investments aggregated `4.59 bn across eight companies. We believe that the company has protected its rights well (through SHA and term sheets) with committed IRRs (~21.0% to 23.75%) and well structured exits. PFS has representation on numerous boards which enables them to get clear understanding of the ground level realities and operational issues. The management has indicated that going forward ~30.0% of the capital infusion (retained earnings) of the company will go towards equity investment while the rest will be available for leveraging. We expect PFS s equity book to grow to ` 7.33 bn by FY14E. Details of the equity investment Out of the eight companies that the company has invested in, seven of them is into power generation projects with four thermal power projects and the rest involves renewables. Some of its strategic Investments include the one with Indian Energy Exchange, wherein PFS made principal investment in IEX in December 2007, investing ` 65.0 mn for 26.0% shareholding. It further invested `4.39 mn in March 2009 for further capital requirement of IEX in order to maintain their 26.0% stake, thereby making a total investment of `69.4 mn. In September 2010, the company liquidated its 4.88% stake in IEX for a consideration of ` mn, valuing the remaining stake (21.12%) at ` mn based on the last concluded deal. In the current financial year the company is expected to divest a portion of its stake in India Energy Exchange as it is required to bring down its stake in the company to 5.0% by FY13. Added to this, the company has a put option in Ind-Bharat Powergencom Ltd which is exercisable in August Some of the key details of the equity investment in terms of financial closure, land acquisition, regulatory approvals and fuel sourcing is given below;- Table 2: Overview of major equity investment Equity Investments Capacity (MW) Outstanding as of Mar 11 (` mn) Indian Energy Exchange Limited * N.A Ind-Barath Powergencom Limited Ind- Barath Energy (Utkal) Limited Meenakshi Private Limited Energy East Coast Energy Private Limited 1, RS Wind Energy India Limited Others Source: Company Data, ABML Research Investment Status Operational since June PFS currently holds 21.12% in the company after divesting its part stake in the company. Another portion of divestment expected in FY The project has been commissioned. PFS has put option exercisable in August Financial closure has been achieved. All clearances have been received and project is on track to be implemented by March Phase I (300MW) project is expected to be commissioned in December 2011 Phase II (600 MW) project is on track after financial closures and expected to be commissioned in March After Financial Closure project was on track. Government order on recent environment issue is awaited. Exercise is underway for swap of shares to the holding company awaiting FIPB approval. All the Machines of phase I (41.25MW) have been commissioned. N.A In as subsidiary for WTG manufacturing facility Total Page No. 5

6 As against the general apprehension in the market regarding the project execution for coal based power projects, PFS s projects are well placed in terms of fuel sourcing. All the below mentioned projects have PPA with PTC India Ltd. Moreover Ind-Bharath powergencom is already commissioned, which shows the credibility of the management and timelines shared in the public forum. Table 3: Thermal Power Projects Fuel and PPA arrangements (Equity investments) Fuel Source Total No. of Projects Name of the Company 100% Domestic Coal Linkage with a backup of Group coal mines abroad Coal Tolling arrangement with PTC 100% Imported Coal Coal imported by PEL and with a group company coal mine abroad 70% Domestic Coal linkage + 30% Imported Coal With Group Company coal mine abroad % of total sanction of coal projects 1 Ind- Barath (Utkal) Ltd % 1 Meenakshi Energy Phase I 20.25% 1 Ind- Barath Powergencom 11.49% 1 East Coast Energy Pvt. Ltd % Others 1 Meenakshi Energy Phase II 19.01% Total 5 100% Source: Company Data, ABML Research Other key rights and features of the major equity investment as given in the Share Holding Agreement (SHA) which further strengthens the company s position are - Table 4: Other key details as per SHA Equity Investments Guaranteed Cumulative Return (%) Management and the right to appoint director(s): Right to affirmative vote Tag along right Put option with the company IPO Ind-Barath Energy (Utkal) Limited 23.65% 1 director for each block of 10% of the total paid up equity share capital Yes Yes, if shareholding of IBPIL in IBPL falls below 51% Yes, at any time within 5 years from the date of allotment of equity shares Right to participate in the IPO Ind-Barath Powergencom Limited 23.75% 1 director for each block of 10% of the total paid up equity share capital Yes Yes, if shareholding of IBPIL in IBPL falls below 51% Yes, at any time within 3 years from the date of allotment of equity shares Option to switch to IPO RS India Wind Energy Private Limited No 1 director for each block of 15% of the total paid up equity share capital Yes Yes, if owner s shareholding in RSI falls below 37% No Right to participate in the IPO Meenakshi Energy Private Limited 21% 1 director for each block of 15% of the total paid up equity share capital Yes Yes, at any time Yes, if owner s within 5 years from shareholding in RSI January 5, 2011 if falls below 51% MEPL's IPO fails Right to participate in the IPO East Coast Energy Private Ltd No 1 director for each block of 15% of the total paid up equity share capital or aggregate par value of ` 1.2 bn whichever is lower NA* No No Yes, Option of swapping our shares in East coast to AGPL * Information not available Source RHP, ABML Research Therefore, on an overall basis, PFS is likely to do well on its Equity portfolio given the professional set-up, guidance and support of PTC and its involvement and representation at the projects. Loan financing book to grow with increasing leverage - Margins and return ratios to stabilize going forward PFS is involved in providing debt financing as well as structured debt financing. There is a huge demand for financing in the power sector owing to planned large-scale investments due to increasing demand for power. This gives the company immense opportunity to grow its loan book size going forward. During FY11, the company has sanctioned a total debt of `17.13 bn to 20 projects. Cumulatively, the effective sanctions of PFS as on March 31, 2011 stood at `30.46 bn. PFS s loan book as on March 31, 2011 stood at `6.76 bn. As far as the project mix is concerned, PFS s loan book is well distributed across Page No. 6

7 the value chain with coal-based projects constituting 63.0% and 66.0% of the total sanctions and disbursements, respectively, while the rest is contributed by hydro, wind, solar, biomass, gas, etc. Currently the company s loan financing book is very small mainly due to lower leverage of ~1.0x (calculated post deducting equity investment from net worth). However, the equity raising initiative by the company recently through an initial public offer will provide enough room to increase its leverage, which will drive the growth in loan book going forward. We expect the loan book to grow at a CAGR of ~75.9% over the next three years (on lower base) with leverage increasing from the current 1.0 x to 4.9 x by FY14E. Graph 1 Loan book growth with leverage Graph 2 Project Mix Sanctions Graph 3 Project Mix - Disbursements (in Rs. bn) FY09 FY10A FY11E FY12E FY13E Loan Financing book Leverage (x) Solar 2% Hydro 17% Gas 3% Wind 6% Cogen 2% Others 2% Biomass 5% Coal 63% Hydro 3% Others 6% Wind 12% Gas 9% Biomass 4% Coal 66% Source: Company Data, ABML Research There is a general nervousness in the market with regard to the successful execution of the coal based power projects due to fuel shortage, environmental clearances and various other concerns leading to delay in project execution. On detailed analysis of fuel source and PPA arrangements of PFS s loan financing to coal based power projects, we found that around 32.0% of the total sanctions to the coal based power projects have 100% domestic coal linkages, ~38.4% have 100% captive coal blocks and 8.9% have their own mines abroad. The remaining 20.7% have 70.0% domestic coal linkages and only for 30.0% dependent on imported coal. Thus, PFS s sanctioned loan book to coal based power projects is relatively safe in terms of fuel source risk. Table 5: Thermal Power Projects Fuel and PPA arrangements (Loan financing book) Fuel Source No. of Projects Amt. Sanctioned % of total sanctions PPA with PTC (Long / Short Term) PPA with State Utilities / Captive Sanctioned & Disbursement started (Case 1 or process of FSA started) % 2 100% Domestic Coal Linkage Sanctioned but disbursement yet to start Group Company having own mines % 1 1 (Captive) Others % 100% Captive Coal Block Sanctioned & Disbursement started Sanctioned but disbursement yet to start % (Captive) 100% Imported Coal through own mines % 1-70% Domestic Coal linkage + 30% Imported Coal Sanctioned & Disbursed % Sanctioned but documents yet to be executed % 2 - Total % 7 6 Source: Company Data, ABML Research Page No. 7

8 Margins and return ratios to stabilize consequently At present the company enjoys very high net interest margins on the back of high share of short term loans (~42.0%) in the total debt financing book. The interest rate on short term loan is generally higher (~14.0%-16.0%) because of higher risk involved. However, going forward the management has indicated that the company will focus more on long term loans to bring stability within the loan book. Consequently, we believe the margins to stabilize going forward to sub 4.0% levels from the current 7.0%-8.0% levels. The return ratio on the other hand is very tepid currently because of large equity base with very low leverage. However, we believe, the return ratio to stabilize over the next three years once the full benefit of leveraging comes into play. Graph 4 Net Interest margin and Spreads Graph 5 Return Ratios 10% 8% 17.2% 8.4% 20.0% 16.0% 14% 12% 10% 9.2% 13.2% 20.0% 16.0% 6% 4% 2% 0% 5.8% 11.9% 4.5% 3.7% 2.8% 5.8% 4.7% 4.3% FY09 FY10A FY11E FY12E FY13E 12.0% 8.0% 4.0% 0.0% 8% 6% 4% 2% 0% 4.1% 4.5% 5.0% 5.8% 2.3% 2.8% 2.4% 3.2% FY09 FY10A FY11E FY12E FY13E 12.0% 8.0% 4.0% 0.0% Spread (%) NIM (%) Return on Avg Equity* Return on Avg Assets* Source: Company Data, ABML Research Borrowing profile to get diversified - IFC status to enhance the company s ability to raise funds on cost-competitive basis Currently, the company s borrowing profile is less diversified with NCDs and bank term loans constituting 58% and 42% respectively. However, going forward the management has indicated that the company will explore various other avenues of raising funds and make its borrowing profile more broad based. In light of this, in Q4 FY11 the company has raised ~`0.42 bn through issuance of long term infrastructure bonds and is likely to raise funds through ECBs (agreement with DEG already in place) in the current quarter. The management expects share of bank borrowing to come down going forward to ~20.0% by FY14E, while NCDs, ECBs and infrastructure bonds are likely to constitute around 40.0%, 30.0% and 10.5% respectively. PFS was granted IFC status in August 2010 thereby enhancing its ability to raise funds on cost-competitive basis. The IFC status has given the company more operational flexibility as now it is entitled to lend up to 25.0% of its owned funds to a single borrower in the infrastructure sector, compared to 20.0% of owned funds by other NBFCs. It also enabled the company to raise capital through issuance of infrastructure bonds at comparatively lower yields (as infrastructure bondholders are entitled to certain tax benefits) and raise ECBs up to 50.0% of its owned funds without prior RBI approval, thereby reducing cost of funds. In October 2010, the company has entered into a loan agreement with Deutsche Investitions (DEG) for an aggregate amount of $ 26.0 mn for on-lending to renewable energy projects. In addition to this, it also entered into a letter agreement with International Finance Corporation on January 20, 2011 for a proposed loan of $ 50.0 mn for the same purpose. Graph 6 Borrowing profile (Dec 2010) Graph 7 Expected Borrowing Profile (FY14E) Infra Bonds 10% NCDs 42% NCDs 40% Bank Borrowing 58% ECBs 30% Bank Borrowing 20% Source: Company Data, ABML Research Page No. 8

9 Currently, the company enjoys strong credit rating and we believe it to further improve going forward, mainly driven by increasing proportion of long term financing in its loan-financing book, which are more stable and less risky. Added to this, attainment of optimal mix in equity investment and loan financing would also aide in improving the credit rating. As a result of improved credit rating, the cost of borrowing for PFS is also likely to come down, other things remaining unchanged, which means that a hike in base rate might not lead to a corresponding similar hike for the PFS, as the improved credit rating would mitigate some of this. (Ex: if hypothetically current borrowing is at base rate +300bps on the current rating, then one year hence with base rate going up by 100bps for the bank and credit rating improving for PFS, the terms could be base rate + 250bps, thereby mitigating the hike by 50bps at the net level). Currently, the company s long-term bank borrowings and NCDs has been rated LA+ (positive outlook) by ICRA. Its short-term borrowings has been rated A1+ by ICRA, which is the highest credit quality rating provided by ICRA. Strong parentage Provides early access to potential business opportunities PFS is a subsidiary of and is promoted by PTC India Ltd (PTC), which is the market leader for power trading solutions in India. PTC is a GoI initiated company promoted by NTPC, Power Grid, PFC and NHPC. PTC provides comprehensive solutions in the energy value chain including services such as power trading, codevelopment, fuel-intermediation and consulting. PFS benefits immensely from the power sector expertise, network and relationships of PTC and its affiliates. The strong parentage provides the company with early access to potential business opportunities in the energy value chain in India. It also enables the company to understand and efficiently cater to the needs of the developers in a comprehensive manner. The company has received many references made by PTC in the past which can be gauged from the fact that most of the ten principal investments that the company s Board has approved, has been developed out of initial references made by PTC. This provides PFS a wonderful platform within the group to grow the financing portfolio (it is the only arm within the group for debt financing). The existence of PTC in some of the proposals reduces the delinquency rate relatively due to existence of an off-take arrangement, etc. Focusing on expanding fee based services and CER financing The company provides various fee based services that includes primarily debt facility agent and security agent services as well as various advisory services such as techno-commercial appraisal services. In addition, in March 2010 they commenced carbon credit financing, which involves purchase of future CERs from power project developers for sale to 3rd parties. As of December 31, 2010 the company has approved funding in form of funding against CERs aggregating ` mn to two companies with projects aggregating 108 MW capacity. Going forward, the company intends to increase its focus on fee-based services to bring some diversification in its revenue stream. The fee based business would grow but not in proportion /linear to the growth in the loan book. We expect fee income to grow at a CAGR of 31.3% over FY11-14E. Page No. 9

10 Peer Group Analysis PFS is very small in terms of size as compared to its listed peer group i.e. REC and PFC ltd and therefore do not compete with each other. PFS s business model is also unique (strategic equity investments in power projects) which makes direct comparison unjustifiable. (Equity Investments are 45% of the net-worth). The comparison in RONW is also not relevant because of lower leverage of PFS coupled with huge investment book made out of the networth, which has an implied ROE and profits gets reflected in P&L a/c only at the time of exits (under current accounting standards). Particulars (In ` mn) PFS REC PFC Outstanding Loan (in bn) Gross NPA (%) Spread (%) NIM (%) RONW (%) ROA (%) Valuations Price P/E (on FY11 earnings) P/ABV (on FY11 ABV) Source: Company, ABML Research Risk Factors Conflict of interest PFS is significantly dependent on PTC for growing and supporting its business. In the past, the Company has received many of the principal investment and debt financing opportunities from references made by PTC. With promoters have interest in similar line of business, it may result in conflicts of interest which may affect future financing opportunity referrals. Concentration of loan The company s debt finance business is concentrated on a few borrowers in the power sector and if any of the loans to these borrowers become non-performing, the quality of loan portfolio may be adversely affected. As on December 31, 2010, the ten largest borrowers in terms of loan financing outstanding accounted for 94.2% of total outstanding loan financing as of such date. Page No. 10

11 Valuation: Environmental clearance, fuel security and linkages, long term PPA s and overall timely execution are critical to the success of projects and therefore its Equity and debt investments. PFS along with its parent PTC, we believe, has good control on projects and finances, as it is representing on numerous boards, which provides clear understanding of the ground level realities and operational issues, thereby facilitating execution. Considering the company s strong parentage, huge demand for financing in the power sector, unique business model and low leverage, we believe PFS is a young outfit and growing very rapidly with all right ingredients to make it big. In 2008, PFS sold 22% of its stake in the company for a consideration of ` 1.6bn to PE players Macquarie and Goldman / share. The projects and the company have made good progression since then. This stake sale by the company, which is only ~10.0% less than the current price, gives us more comfort. We have valued PFS in two parts i.e. equity investment book and loan financing book separately. For valuing the equity investments, we have considered three scenarios and assumed a post tax IRR of 18.0%, 15.0% and 22.0% for base case, bear case and bull case scenarios. Our assumption in the base case scenario stands conservative in light of the committed post tax IRR in the range of %. The reason we have build in three scenarios is because of the inherent risks in private equity type model and the current apprehensions in the sector. Equity Investments Base Case We have assumed base case post tax equity IRR of 18% and cost of equity of 14% for the Equity Portfolio, and arrive at the fair multiple of 1.54x to its current equity investment book of ~4.59 bn. Applying this derived multiple to FY14E equity investment book of ~7.33 bn and discounting it at FY12, gives us a value of `15.4 / share. Bull Case Assuming post tax IRR of 22% and cost of equity of 14%, we arrive at a fair value of `17.8 / share (1.78x its equity investments). Bear Case Assuming post tax IRR of 15% and cost of equity of 14%, we arrive at a fair value of `13.8 / share (1.37x its equity investments). Scenario analysis of per share value of equity investments Source: ABML Research Loan financing Ke \ IRR 22% 18% 15% 12% % % % % We have valued the loan financing book at 1.1x its FY12E book value of ` 5.25 bn, thus giving a fair value of `5.77 bn or ` 10.3 / share. Our target multiple reflects 20.0% discount to average FY12E multiple of PFC and REC. This gives us the fair value for both the business at 25.7 /share in the base case scenario and 28.1 /share in the bull case scenario and 24.0 / share in the bear case scenario (three scenarios refers to value of equity investments), implying an upside potential of 45.4%, 59.2% and 36.2% respectively. Graph 8: Projected stock price under different scenarios Bull case: 28.1 Base case: 25.7 Bear case: CMP 17.7 Mar-11 Apri-11 May-11 Jun-11 Mar-12 Page No. 11

12 Financials PFS Income Statement Balance Sheet Financial Year (` mn) FY09 FY10A FY11E FY12E FY13E Financial Year (` mn) FY09 FY10A FY11E FY12E FY13E Net Interest Income Sources of Funds Growth (%) Capital 4,346 4,346 5,621 5,621 5,621 Income from Investment (post tax) Reserve and Surplus 1,748 2,014 4,556 5,538 7,111 Other Operating Income Net Worth 6,093 6,359 10,177 11,159 12,732 Net Income Borrowings 200 3,108 5,699 10,227 19,042 Operating Expenses Growth (%) 1, Operating Profit (pre-prov.) Deferred tax liabilities (net) Other Prov. & Contingencies Total 6,293 9,511 15,926 21,436 31,824 Profit Before Taxes Prov for tax* Application of Funds Net Profit Fixed assets Growth (%) Investments 2,000 4,067 4,637 5,962 6,388 Growth (%) Loan financing 200 2,662 6,756 12,518 23,155 Growth (%) 1, Net Current Assets 4,089 2,431 4,232 2,696 2,059 Deferred tax assets (net) Total 6,293 9,511 15,926 21,436 31,824 Key Ratios Valuation Ratios Financial Year (`mn) FY09 FY10A FY11E FY12E FY13E Financial Year (`mn) FY09 FY10A FY11E FY12E FY13E Return Ratios EPS* Average Yield on loans*** 17.7% 19.0% 14.8% 14.3% 12.7% P/E (x) Average Cost of funds*** 11.9% 10.6% 10.3% 10.7% 9.9% BVPS Spread*** 5.8% 8.4% 4.5% 3.7% 2.8% P/BV (x) NIM*** 17.2% 11.9% 5.8% 4.7% 4.3% Return on Avg Equity** 2.4% 4.1% 4.5% 9.2% 13.2% Return on Avg Assets** 2.3% 3.2% 2.8% 5.0% 5.8% Source: ABML Research, company data Note: * For FY12 and FY13 provision for tax is on PBT excluding income from investments ** Includes income from investment *** Historical yields, costs and margin as given in RHP calculated on weighted average Page No. 12

13 Research Team Vivek Mahajan Head of Research Fundamental Team Avinash Nahata Head of Fundamental Desk Akhil Jain Metals & Mining Sunny Agrawal FMCG/Cement Sumit Jatia Banking & Finance Shreyans Mehta Construction/Real Estate Dinesh Kumar Information Technology/Auto Pradeep Parkar Database/Production Quantitative Team Rizwan Khan Technical and Derivative Strategist Jyoti Nangrani Sr. Technical Analyst Raghuram Technical Analyst Rahul Tendolkar Derivatives Analyst Amit Somani Derivative Analyst Advisory Support Indranil Dutta Advisory Desk HNI Suresh Gardas Advisory Desk Sandeep Pandey Advisory Desk ABML research is also accessible in Bloomberg at ABMR Page No. 13

14 Our Rating Methodology Stock Ratings Absolute Returns (R) Buy R > 15% Accumulate 5% < R 15% Neutral -5% < R 5% Reduce -10% < R 5% Sell R -10% Disclaimer: This document is not for public distribution and is meant solely for the personal information of the authorised recipient. No part of the information must be altered, transmitted, copied, distributed or reproduced in any form to any other person. Persons into whose possession this document may come are required to observe these restrictions. This document is for general information purposes only and does not constitute an investment advice or an offer to sell or solicitation of an offer to buy / sell any security and is not intended for distribution in countries where distribution of such material is subject to any licensing, registration or other legal requirements. The information, opinion, views contained in this document are as per prevailing conditions and are of the date of appearing on this material only and are subject to change. No reliance may be placed for any purpose whatsoever on the information contained in this document or on its completeness. Neither Limited (ABML) nor any person connected with it accepts any liability or loss arising from the use of this document. The views and opinions expressed herein by the author in the document are his own and do not reflect the views of Limited or any of its associate or group companies. The information set out herein may be subject to updating, completion, revision, verification and amendment and such information may change materially. Past performance is no guarantee and does not indicate or guide to future performance. Nothing in this document is intended to constitute legal, tax or investment advice, or an opinion regarding the appropriateness of any investment, or a solicitation of any type. The contents in this document are intended for general information purposes only. This document or information mentioned therefore should not form the basis of and should not be relied upon in connection with making any investment. The investment may not be suited to all the categories of investors. The recipients should therefore obtain your own professional, legal, tax and financial advice and assessment of their risk profile and financial condition before considering any decision. Limited, its associate and group companies, its directors, associates, employees from time to time may have various interests/ positions in any of the securities of the Company(ies) mentioned therein or be engaged in any other transactions involving such securities or otherwise in other securities of the companies / organisation mentioned in the document or may have other potential conflict of interest with respect of any recommendation and / related information and opinions. Analyst holding in the stock: NIL Limited 2 nd Floor, Sheil Estate, Dani Corporate Park, 158 CST Road, Kalina, Santacruz (East), Mumbai Tel: Page No. 14