Power Trading Corporation -Abstract of Interview with CMD

Q2 performance saw its net profit increasing by 29% and the volumes by 21%? What are the company’s margin growth and other targets for the future?

PTC When it comes to performance indicators and targets, volume and margin growths are the key aspects instead of income. Volume plays a key factor in the company’s growth. At present our market share is increasing. If we go by CERC figures we have a share of around 20-25% in the market. But these figures do not cover the intra state trading done by us. Collectively we have a 40-45% market share. Further we trade power from the long term PPAs signed by us with different companies, including a 1400 MW agreement with Bhutan. We get 700 MW of power on average from Bhutan, 300 MW from Chhattisgarh and 70 MW of hydro power from Orissa, which we trade in the market. A number of projects are expected to be commissioned in the future as well. So I see PTC’s market share by volume to be greater than 50% in the coming years.

We follow the CERC guidelines for trading. Margin has increased from 4.1 paise from last year to 4.6 paise in the present year. The figure is low mainly because of a lower margin on power from Bhutan.

 

MSP Do we see an increase in long term PPAs with PTC in the future?

PTC   Yes, we do plan to increase our focus on long term PPAs. In energy terms we get one-third of our power from long term PPAs. By signing PPAs with us, the developers are given the option of mitigating both credit risk and market risk, thereby easing out the process for these developers. Volume in the long term segment will grow in the future and will become a major part in our portfolio.

 MSP Can we say that the since the volume of PTC has risen by 21%, power generation has also gone up by the same figure?

PTC   No we cannot assume this as the increase in generation has to be assessed by the overall increase in the market size and not just from trading volume. But what we can definitely assume is that with an increase in trading, the power generation is definitely increasing as now more and more is coming as merchant power. We have a rising trend to sell through trading. The market is developing now.

MSP  What are the plans for PFS fund raising?

PTC   PTC formed PFS as an NBFC in 2007 with the aim of funding various power sector projects. So for it, raising finance is a continuous exercise. As of march 31, 2010, PFS’ net worth was Rs. 625 crores and it has already sanctioned loans worth Rs. 2000 crores and equity worth Rs. 500 crores. Out of this, loans worth Rs. 300 crores and equity worth Rs. 400 crores has already been disbursed. PFS faces high demand from power developers for funds.

We have two options to go for the fund raising- pre-placement and IPO. A decision on pre-placement will be finalised by the Board by November end.

MSP Are there any new avenues that PFS is planning to venture into?

PTC Currently PFS supports 10,000 MW of power in the country. We have already initiated our foray into carbon financing and plan to provide with financial advisory services soon. PFS is the only NBFC providing carbon financing in the country.

MSP  What are PTC’s plans for coal mines acquisition, both foreign and domestic? Who are PTC’s clients for coal? What is the future coal outlook in India?

PTC   We have already started coal trading and are importing 7 lakh tonnes of coal per year from Indonesia and are selling in the domestic market. We have plans to add another 1.7 million tonnes (MT) within one year, thus increasing our total imports to 2.4 MT. PTC’s Board is actively considering increasing its asset base abroad through a joint venture.

Currently we have only private sector players as our clients. There is an interest in supplying to public sector companies.

I feel that we need to strengthen our foreign acquisitions and acquire more coal assets. Looking at the rising shortage of coal in the country, coal imports will rise significantly in the future.

MSP What are the prospects and returns of the Ashmore PTC India Infrastructure Fund with respect to the Indian power sector?

PTC   We initiated the PE fund with Ashmore as there is a continuous need of equity in the Indian power sector. PFS is the main funding subsidiary for us, but being an NBFC, its funding is limited by prudential norms. The fund has a corpus of $750 million- $1 billion. We plan to make the first close at $250 million soon. Other limited partners will also be invited soon. These will include major hedge funds, HNIs, energy funds, etc. Projects are already there in line for funding from this fund. PTC will put in nearly $100-150 million in the fund.

Generally PE funds expect higher returns. The Indian power developer already has a 16% return. We are planning that we will offer a slightly higher than 16% return on the fund.

MSP What was the reason behind choosing Ashmore (60%) as a majority partner? How is the fund different from other PE funds like Blackstone, KKR?

PTC   We shortlisted Ashmore as it is already listed in UK and has active experience in managing energy assets in emerging markets. Besides this, the majority share was given so as to tap international market experience. Also we being investors in power projects have decided to have separate governance for the fund to avoid any conflicting interest with our existing operations.

The PTC Ashmore India Infrastructure fund is a very sector specific fund, focusing on the Indian energy sector. The other PE funds comprise of investments in various sectors in their portfolio. Also PTC has a strong relationship with project developers thus making it easier to associate with the fund.

 MSP How do you see the investment trend in near term and medium term in power generation capacity? Will we achieve the targets as penned down by the Planning Commission?

PTC   Power sector in our country is suffering from a few handicaps on the policy and approvals front. But despite these, many improvements have taken place in the sector.

As per the Planning Commission we are targeting an investment of nearly $171 billion in the power sector in the next plan (2012-17). This is difficult to achieve given the present situation and the limited time frame. Out of the 1 GW capacity that is targeted to be added in the next plan, I foresee that with the present constraints faced by the sector such as taxation, clearances, policy drawbacks, around 65,000 MW of capacity addition will be feasible.  But if these constraints are worked upon by the government, we will be able to add the planned 1 GW of capacity in the concerned time frame. Despite this the Indian power sector is expected to be the main drivers of the Indian economy in the coming years, with increasing investment both from private and public players.

MSP How can trading help in bringing stability in demand supply match and how it can attract more investment?

PTC   Over the years power trading has brought stability in the market. Initially when trading began, there was acute shortage in the market. This will automatically increase the price of power. But over time as the demand supply situation has become slightly better, traded prices have come down. Trading has brought in a sense of certainty in the market, thus increasing investment. As I mentioned before, there is a rising trend of merchant power plants.

MSP Is India ready for full fledged power markets including financial derivatives similar to other developed countries like Nordic, Europe, Australia, UK etc?

PTC   A market can be termed fully developed only if there is commercial viability for developers and reliable and economic power available to the end users. At present, there is a mismatch in the demand and supply position of power across various regions. We need to reduce this mismatch by adequately trading power across various regions. There is a need for promotion of higher inter-state transmission across regions to help develop the market.

We are not yet mature for a derivative market and need more stability in the short term market price and liquidity. There is a need for increased investment in the market as well.

MSP Can switching to competitive tariff bidding route to attract the long term investment in the power generation be called as the right approach?

PTC   It is a welcome move by the government to get all projects under competitive bidding. Price discovery mechanism and competitive bidding should be made more effective. The idea of competitive bidding will take time to be fully acceptable in the country as it brings in better efficiencies. There are a few drawbacks of competitive bidding like aggressive bids by developers to secure financing for their projects and on getting the project, some developers back out leading to long delays.

By allowing competitive bidding in a deficit market scenario we are bringing in more competition which we believe will attract more investment in the future. I do not expect the prices to go down with competitive bidding in the near future as there is high demand in the market. This will attract new developers which will bring in stability in power generation in the future.

PTC is already doing bidding under Case 1. For all our asset based business we have already formed our subsidiary PTC Energy. We plan to enter into Case 2 bidding in the coming years.