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ptc Grading summary

CRISIL has assigned a CRISIL IPO grade of 3/5 (pronounced "three on five") to the proposed IPO of PTC India Financial Services Ltd (PFS). This grade indicates that the fundamentals of the IPO are average relative to other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy, sell or hold the graded instrument, its future market price or suitability for a particular investor. The assigned grade showcases the high tide of financing opportunities arising for players like PFS thanks to large-scale investments required in the power sector following an increase in power demand. CRISIL Research expects more than Rs 9.3 tn will be invested in the power sector during FY10-15. The grade takes into account the rich vintage of the companys parent, PTC India, which has been a leader in power trading. The parent support will also help PFS in sourcing clients and synergise monitoring of common projects. The grade further draws support from the companys well-laid out systems and processes for project appraisal and collateral requirement. However, the grade is moderated by the relatively small balance sheet of PFS given its short track record. PFS is likely to face intense competition from large banks and non-banking finance companies (NBFCs) who have strong balance sheets and long-existing clients. The companys high cost of funds also impacts its competitive position. The grade factors in the single sector risk (only power) as well as execution risk of the projects funded. PFS reported PAT of Rs 255 mn on a total income of Rs 536 mn in H1FY11. The average yield and cost of funds during the same period were 16.9% and 10.7%, respectively. In H1FY11, the book value was Rs 15.21 per share.

Grading Rationale
The IPO grade assigned by ICRA reflects the favorable long-term demand prospects for the paper industry owing to various government initiatives (such as Sarva Shiksha Abhiyan), low per capita consumption of paper and the over all economic growth being witnessed in the country; the operational advantages with the company in the form of proximity to Tuticorin Port for imports and exports, backward integration with deinking plant and captive cogeneration power plant and technology advantages such as POM technology; the promoters established track record in the paper manufacturing and engineering industry spanning over four decades; and the minimum project execution risks on account of completion of Phase I and commencement of commercial production from April 2010. The grading also factors in the anticipated supply glut in the industry with ongoing capacity expansion programs of other incumbents in the medium-term leading to possible pricing pressures; the cyclicality inherent to the paper industry leading to fluctuating profit margins; and, the high fragmentation in the industry. The grading is also constrained by the vulnerability of profits to forex rate fluctuations as the company is exposed to exports (currently estimated at 20% of total sales) and imports (currently estimated at 70% of total purchases including imported fuel for co-generation power plant); the limited track record with production under stabilization phase for PWP; and the weak financial risk profile with high gearing (4.27 times as at end-March 2010).

Grading Rationale
The assigned grading takes into consideration diversified client base of IIL which is spread across various industries like automobile, power and energy, general engineering, furniture etc. The company has developed an in-house process known as Tube Cold Rolling or Pilgering to manufacture CEW tubes which results in relatively lower fuel and labour expenses and thereby improving the profitability. The company has applied for process patent for Tube Cold Rolling process. IIL has also developed an import substitute for membrane panel strips which is used in boilers and being a critical component, the profitability is relatively superior in this component as compared to tubes provides for automotive applications. The company claims to be the largest domestic supplier of membrane panel strips to companies like Bharat Heavy Electricals Limited, Thermax Limited, Alstom Projects India Limited, Cethar Vessels Limited. The grading also favourably factors in long standing experience of the promoters in the industry and their close control on operations of the company. The grading is however constrained by weak capital structure of IIL characterized by high gearing; low capacity utilization; high working capital intensity and limited ability in passing raw material price fluctuations. ICRA also notes that regular investment towards capacity addition and working capital intensive operations of the company has resulted in stretched cash flow position over the years, which is likely to persist in the near to medium term. IIL