PTC India, India's largest power trader, is at the cusp of a transformation. The Rs 11,565-crore company's efforts at de-risking and consolidation have started bearing fruits. Volumes grew 25 per cent to 35 billion units along with profitability after a multi-year stagnation. Deepak Amitabh, PTC's chairman and managing director, tells Sudheer Pal Singh that this was achieved by focusing on core business with long-term contracts as well as a bit of caution. Edited excerpts:
Many licensed power traders have exited this business. What has gone wrong?
One has to understand the power market. It comprises the exchanges, bilateral route, traders and long-term contracts. The short-term market arose out of the illiquid contracts that existed in the long-term market. When power trading was introduced in 2004, we had highlighted that the net worth criteria for a trading entity should be kept stringent. This was so that traders do not go burst, otherwise the entire power market would collapse. However, it was thought that PTC wanted to maintain its monopoly on the market. Now many new entrants have burnt their hands. People are realising that trading can be risky without adequate net worth.
PTC has always believed the margin should be left to the market to decide. The current market situation reflects this. Although there is a cap of 7 paise a unit in the short-term market, actual operation takes place only at an average margin of 4 paise a unit. Owing to market forces, the average margin has settled at 4 paise. So, there is no use keeping an artificial margin cap. However, PTC is a volume player. We believe the volume should keep increasing.
What explains the significant jump in your otherwise-stagnant profitability in FY14?
We always knew we would not be able to retain our market share if we are to be completely dependent on the deals in the short-term market. Our original role, or aim with which PTC was created, was to insulate the IPPs (independent power producers) from market or credit risk. So, we had started entering into long-term PPAs (power purchase agreements) as early as 2004-05 along with back-to back sale agreements. Today, short-term trade accounts for 60 per cent of our trading volume. Long-term trade has helped.
Also, the retail segment has grown significantly. Our business depends on capacity addition. Significant capacity has come on stream in the past two or three years. Going forward, the pace of generation will grow as a lot of stressed assets in the thermal sector are gradually commissioned. For example, we have signed 1,400 Mw capacity power sale agreements in the past year. All of this is due to the changing economic sentiment, which is fuelling capacity and thus our volumes. We have also carried out de-risking of our business. We have been involved in initiatives like tolling where we supply coal and sell the power produced. There profitability was high but it came with high risk, too. So we have now replaced tolling into a PPA model. That is why there has been a decline in out coal imports.
Would this positive sentiment be strong enough to motivate you to revive your earlier plan of floating the $1-billion energy-infrastructure fund?
When this idea was floated in 2009-10, we had an agreement with US-based Ashmore Group, the obstacles to economic growth had started appearing. Ashmore had to raise fund globally. By 2011, it was realised that raising a fund of this magnitude was not easy in that market situation. But now that has been reversed and we already have an NBFC (non-banking financial company) PTC Financial Services. We have already approved the proposal to float an asset management company in the last board meeting. The company will float a fund for, let us say, stressed assets. We have realised it is important to be nimble-footed in the world of private equity.
You have been earmarking Rs 300 crore annually for acquisition of coal assets abroad. What is the current status of that plan?
We have been looking at assets since 2010-11. Pricing is most critical part of such deals. We have the example of a few Indian companies, which have gone ahead and acquired assets at high valuations since then. But they have all gone through pains. We had these opportunities and we had the money. But buying assets at that valuation would have only created stress for us and for the banking sector. The high valuations being asked at that time were based on the assumption that commodity price boom is here to stay. Even now, prices are likely to remain subdued for some time. The largest coal guzzler, China, has cut imports. We have a war chest of Rs 500-600 crore earmarked for this purpose. However, we are going to be cautious.
Many licensed power traders have exited this business. What has gone wrong?
One has to understand the power market. It comprises the exchanges, bilateral route, traders and long-term contracts. The short-term market arose out of the illiquid contracts that existed in the long-term market. When power trading was introduced in 2004, we had highlighted that the net worth criteria for a trading entity should be kept stringent. This was so that traders do not go burst, otherwise the entire power market would collapse. However, it was thought that PTC wanted to maintain its monopoly on the market. Now many new entrants have burnt their hands. People are realising that trading can be risky without adequate net worth.
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Is there a case for a revision of the 7-paise-a-unit trading margin cap?
PTC has always believed the margin should be left to the market to decide. The current market situation reflects this. Although there is a cap of 7 paise a unit in the short-term market, actual operation takes place only at an average margin of 4 paise a unit. Owing to market forces, the average margin has settled at 4 paise. So, there is no use keeping an artificial margin cap. However, PTC is a volume player. We believe the volume should keep increasing.
What explains the significant jump in your otherwise-stagnant profitability in FY14?
We always knew we would not be able to retain our market share if we are to be completely dependent on the deals in the short-term market. Our original role, or aim with which PTC was created, was to insulate the IPPs (independent power producers) from market or credit risk. So, we had started entering into long-term PPAs (power purchase agreements) as early as 2004-05 along with back-to back sale agreements. Today, short-term trade accounts for 60 per cent of our trading volume. Long-term trade has helped.
Also, the retail segment has grown significantly. Our business depends on capacity addition. Significant capacity has come on stream in the past two or three years. Going forward, the pace of generation will grow as a lot of stressed assets in the thermal sector are gradually commissioned. For example, we have signed 1,400 Mw capacity power sale agreements in the past year. All of this is due to the changing economic sentiment, which is fuelling capacity and thus our volumes. We have also carried out de-risking of our business. We have been involved in initiatives like tolling where we supply coal and sell the power produced. There profitability was high but it came with high risk, too. So we have now replaced tolling into a PPA model. That is why there has been a decline in out coal imports.
Would this positive sentiment be strong enough to motivate you to revive your earlier plan of floating the $1-billion energy-infrastructure fund?
When this idea was floated in 2009-10, we had an agreement with US-based Ashmore Group, the obstacles to economic growth had started appearing. Ashmore had to raise fund globally. By 2011, it was realised that raising a fund of this magnitude was not easy in that market situation. But now that has been reversed and we already have an NBFC (non-banking financial company) PTC Financial Services. We have already approved the proposal to float an asset management company in the last board meeting. The company will float a fund for, let us say, stressed assets. We have realised it is important to be nimble-footed in the world of private equity.
You have been earmarking Rs 300 crore annually for acquisition of coal assets abroad. What is the current status of that plan?
We have been looking at assets since 2010-11. Pricing is most critical part of such deals. We have the example of a few Indian companies, which have gone ahead and acquired assets at high valuations since then. But they have all gone through pains. We had these opportunities and we had the money. But buying assets at that valuation would have only created stress for us and for the banking sector. The high valuations being asked at that time were based on the assumption that commodity price boom is here to stay. Even now, prices are likely to remain subdued for some time. The largest coal guzzler, China, has cut imports. We have a war chest of Rs 500-600 crore earmarked for this purpose. However, we are going to be cautious.