DR. ASHOK HALDIA

Questionnaire from Capital Market for
WHOLE TIME DIRECTOR
DR. ASHOK HALDIA
PTC India Financial Services Limited

1. Kindly explain your business model. How is your company different from other power finance companies? What is your USP (Unique Selling Proposition)?

PTC India Financial Services Limited (PFS) is promoted by PTC India Limited (PTC) for making investment in the energy value chain.

It has been classified by Reserve Bank of India (RBI) as Infrastructure Finance Company (IFC) with the resultant advantages in financing projects, and in mobilization of resources.

PFS is currently devoted to financing power projects undertaken by IPPs. It provides equity as well as debt based financing products structured to requirements and risk profile of the specific project/s. It is possibly the only company in power sector to do so. It is a multi-product company with both fee-based and non fee-based offerings.

PFS is structured as a ‘one-stop shop' providing various products for financing of power projects and over the project life cycle. Drawing from PTC patronage, PFS gets early access to power projects and its USP lies in its ability to undertake risk analysis of power projects and add-value by mitigating those while structuring the financial products.

• How has FY'11 been and how do you read the coming year?

FY 11 was a quite happening financial year for PFS in terms of numbers and substance both. PFS received the status of Infrastructure Finance Company from RBI, issued its first retail long term infrastructure bonds, completed its Initial Public Offering despite the adverse capital market conditions and entered in to discussion with DEG and IFC for long-term ECB.

Operating Income was Rs 103.68 crore in FY 11 as compared to Rs 39.53 crore in FY10 higher by 162% and PAT for FY11 was Rs.37.03 crore as compared to Rs 25.45 crore in FY10, higher by 45.48%

Considering the recently raised resources towards the end of the FY at competitive rates and with vast potential that exists in financing of power projects, we expect upward trend in growth with a focus on strategic initiatives in financing of renewable projects.

• What is the amount of equity investments as on FY'11? What kind of growth in equity investments does the company expects in FY'12 and FY'13?

PFS has sanctioned participation in equity of power projects aggregating to Rs 564 crore with a disbursal of Rs 460 crore till 31st March, 2011 which would help in capacity creation of 3220 MW. The Company is constantly exploring and evaluating good opportunities for new equity investments.

• Kindly let us know the details of the projects in which the company has major equity investments. In particular, what are the power generation capacity developed by each of these projects, the total project cost, your company's investment and debt exposure to these projects, and when each of these projects is likely to commence commercial production.

As I mentioned earlier, PFS has till date made equity commitments of Rs.564 Crore in 10 power projects at par and at early stage of development thereby.

Major equity investment of PFS comprises of

• Indian Energy Exchange, which was the first power exchange in India and currently holds 21.12% equity after selling part stake in Q3 FY11. Exchange holds approx 85% of the volume traded in power exchanges in India.

• 26% equity stake on buy-back basis in 189 MW thermal power project of Ind-Barath Powergencom Ltd. in Tamilnadu. The project has been commissioned wherein the PPA is with PTC.

• 8% equity stake in 1320 MW thermal power project of East Coast Energy Ltd in Andhra Pradesh which is expected to commission by Mid 2014. PPA has been executed with PTC. Financial closure of the project has been achieved.

• 13.19% equity stake in 700 MW pit head thermal power project of Ind Barath Utkal Pvt. Ltd in Orissa which is expected to be commissioned by May 2012.

• 19% stake in 900 MW thermal power project of Meenakshi Energy Pvt. Ltd. in Andhra Pradesh. Financial closure has been achieved and project is under implementation.

• 37% equity stake in 99.45 MW wind power project of RS India Wind Energy Ltd in Maharashtra. Phase I of 41.25 MW is commissioned, and the balance is under development.

1. What exit strategies does the company can employ for the equity investments?

PFS adopts a multi pronged exit strategy which varies from project to project depending upon the stage of the development of the project, risk profile, need of the project and the promoter thereof. Exit approaches include one or more measures like exit through the IPO, buy-back, and strategic sale.

The equity linked products also include optionally convertible debentures and compulsory convertible debentures. While there is no pre-defined period in terms of number of years for the exit, the timing of exit would normally depend upon the potential increase in the value of investment, need, and stage of development of the project. We made partial exit from Indian Energy Exchange (IEX) by partially offloading equity stake in FY11, and plan to further divest during the current year. Buy back of PFS share in Ind-Bharat Powergencom Limited is also slated in the current year.

• What were the sanctions and disbursements for FY'11 (including equity and debt)? What growth does company expects in its sanction and disbursement over next few years.

We have sanctioned more than Rs 1700 crore with a disbursal of around Rs 800 crore in FY11 and considering the requirements of financing power projects in India and the limitations of the existing institutional set-up available in the country for financing private power projects, PFS envisages a significant growth in the current year's operation as well. As on 31^st May, 2011, effective undisbursed debt sanctions were approx. Rs.2600 crore.

• Power projects are having concerns of fuel supply, falling merchant power rates, environmental concerns, delays in land acquisition, weakening credit quality of state electricity boards, etc. What impact does it have on the PTC India financial services equity and debt investments to power sector?

The macro-level economic environment and factors affecting the power sector in general would have impact on any of the power sector entity. Business operations of PFS in the current year are not likely to be adversely affected considering the effective sanctions available, stage of development of the projects assisted, and inflow of requests for financing projects.

• What is your outlook for fee based services and CER financing?

Fee based income is interlinked with our main stream operations i.e. sanctions and disbursements. There may be a significant growth as well in our fee based income which will also include fee income from non-fund base assistance to sanctioned projects.

PFS has been proactively pursuing opportunities in the carbon market by providing financing against CERs against spot and future deliveries until 2012. For post 2012 projects, PFS has been following a cautious approach and is waiting for more clarity in the upcoming Conference of Parties (CoP) meeting in Durban to see how things shape up. However, PFS is open for exploring good opportunities for post 2012 CER transaction from both buyers as well as sellers side.

• PTC India Financial Services Ltd. increased its revenues from Rs 11.6 crore in FY'09 to Rs 108.05 crore (CAGR of 205%) while its net profit rose to Rs 37.03 crore from Rs 8.53 crore in the same period (CAGR of 108%). Is this kind of growth sustainable? What kind of moderation does the company see in its growth? What is the sustainable rate?

Business model of PFS is very unique, as explained, having a mix of equity and debt financing. This gives a significant competitive advantage together with fee based / non fund based income.

Being a newly setup Company; we started from a lower base of revenue and profit. Our business growth in percentage terms may tend to stabilize around 40-50% annually with consequent somber effect on PAT in percentage terms.

• PFS capital adequacy ratio is very high at 84.45% at the end of March 2011 compared to regulatory requirement of 15%. Kindly explain.

Being a financing institution, we would like to act prudently and maintain the same around 20%, above the regulatory requirement of 15%.

• PFS primary source of funding is NCD and bank term loan. Does the company expect diversification in its borrowing profile? What is the average cost of borrowing for FY'11?

Yes, in order to bring down the cost of borrowing, PFS has explored the ECB market and already inked loan agreements aggregating to USD 76 Million aggregate with DEG and IFC. We also raised Tax Saving Infrastructure Bonds though in small amount during FY-2011.

PFS has already received A1+ rating for our commercial paper issuance and is looking for good opportunities in future to raise short-term funds.

Despite the increase in interest rate from Banks, PFS has been able to maintain its average cost of borrowing in FY 11 at 10.47% in comparison to 10.60% in FY10.

• But for the equity portion, the debt fund portion is a short-term liability, while the company's advances and investment (in equity of power companies) are long term. Is this not creating asset liability (mis) match in terms of shorter tenure of loans and longer tenure of advances and investments?

Equity investments made by PFS are out of its shareholders funds i.e. equity; lines of credit from banks have been used for debt financing.

Debt financing to projects both short-term as well as long-term are sourced from matching term borrowings and partly from equity. There is hardly any asset liability mismatch (ALM) on our balance sheet.

• Where do you see banking industry, NBFC, power finance industry in general and PFS in particular in the next few years?

Infrastructure Finance Company i.e. IFCs are being promoted by RBI / Govt. of India, to play a pivotal role in meeting growing need of funds for infrastructure development. These would get further momentum as IFC may become centre of future impetus by RBI and Govt. of India for infrastructural lending.

This apart PFS as a financing institution has an added advantage of being an institution exclusively devoted to providing financial assistance to IPPs with patronage of largest power trader in country i.e. PTC. This helps in having domain expertise in financing private power projects, and, access to pipe line of projects for financing.

• What is your growth strategy for next few years? How fast do you plan to grow the balance sheet?

We have a multi-pronged and multi-dimensional strategy. In a scenario where the growth in the volume of operation is not a problem considering vast funding requirements of the power sector, our emphasis is to bring quality in financing by adding value to assisted project and promoter, and continuously upgrading due-diligence level. This would also make PFS an institution with a difference. We would continue to evolve and innovate new approaches in risk analysis and risk-mitigation of power projects as a means to structure optimal financial products tailored to specific needs of projects. New vistas of opportunities for raising resources like Infrastructure Debt Fund would give new dimensions to business strategies of PFS.

• How do you plan to compete with the large power finance companies and banks?

PFS remains reasonably competitive compared to Banks/financial institutions and this is reflected in the business growth and the level of our margin and spreads.

While there are various institutions which provide financial assistance, there is a huge gap not only in resources required for financing power projects but also in terms of kind of support and products required by power projects. In the present times, domain expertise is necessary to add value through financing power projects. In PFS that remains our strong point and receives continued thrust. Further our unique business model gives us distinctive edge.

• What is your outlook on interest rate? How have interest rate movements impacted the PFS?

With the inflation rate remaining upward and recent hike in fuel prices, the interest rates are likely to remain firm at least for the next six months.

The rising interest rates affect the project in generality through increase in the cost of production particularly when these do not have, for one or other reason, ability to pass-on the increase through the prices of end products. So far as PFS is concerned, the average cost of borrowing for the financial year 2010-11 reduced to 10.47% compared to 10.60% in the previous year.

We may be able to absorb and may rather reduce our average cost of borrowing further, with the funds through ECB and tax saving infrastructure bonds available for disbursement purposes this year, as stated earlier.

• What are the new business opportunities do you expect in future?

PFS is looking at the new business opportunities by expanding its areas of financing and by new product development. As we grow, we would be exploring more financing opportunities in transmission and distribution and also in other areas of energy value chain. As the CER market becomes more matured, we should be able to increase level of our financing by taking recourse to various measures for mitigating the credit risk as we see currently. Non-fund based services is something that we have already made a beginning and would like to give major impetus in future.

• What are your major strengths and weaknesses?

Our core strength, which is our USP also, is our business model. PFS is a platform for providing composite financial services. Patronage of PTC, flexibility in operation because of being a professionally managed NBFC with IFC status, and strong domain knowledge are some of our other distinctive advantages that we enjoy.

Challenge before PFS lies in maintaining and increasing the spread available, and ensuring high quality in financing projects.

• Considering the huge equity inflow at the fag end of FY 2010-11, which coupled with increased disbursement and better fee based income, it appears that the company can more than double its profits in FY 2011-12. In this background, kindly share your internal estimate of revenues and profits for the current year.

For a publicly listed company, it is difficult to talk in terms of future projections. However, as stated earlier, PFS has reasonably high prospects for growth in the background and for the reasons stated earlier. Current ability to leverage our capital base of about Rs 1020 crore indicate potential for raising our sanction and disbursement levels over a period of time.

• Any message to our readers / your shareholders?

PFS has a unique business model and it should be seen by shareholders and other stakeholders in that perspective. PFS intends to make a statement for financing power projects with a difference that add high value to the projects, to the developers, and in turn, to PFS and its stakeholders. Our track record could better suggest for the promise that we may hold.