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PFC: Robust loan book growth - Views on News from Equitymaster

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PFC: Robust loan book growth
Jan 17, 2011

Power Finance Corp. (PFC) declared its 3QFY11 results. The institution has reported a 27% YoY and 17% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income rises by 27% YoY during 9mFY11 on the back of an equal (27%) YoY growth in advances.
  • Bottomline expands by 15% YoY in 9mFY11 due to exchange rate losses, (compared to profits last year), lower other income and higher tax outlay.
  • Net interest margin decreased marginally to 4.1% in 9mFY11 from 4.2% in 9mFY10.
  • Gross NPA to advances remain negligible at 0.01% at the end of 3QFY11.
  • Capital adequacy ratio (CAR) stands at 17.3% at the end of 3QFY11.


Consolidated numbers...
Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Income from operations 20,277 25,757 27.0% 59,222 75,111 26.8%
Interest expended 12,714 16,227 27.6% 36,997 47,018 27.1%
Net Interest Income 7,563 9,530 26.0% 22,225 28,093 26.4%
Net interest margin       4.2% 4.1%  
Other Income 22 55 148.8% 471 260 -44.8%
Operating expense 241 277 14.8% 643 641 -0.3%
Provisions and contingencies 10 12 20.9% 29 37 25.3%
Exchange rate (gain) /loss (295) 280   (749) 437  
Profit before tax 7,628 9,015 18.2% 22,772 27,239 19.6%
Tax 1,991 2,426   5,208 7,118 36.7%
Effective tax rate 26.1% 26.9%   22.9% 26.1%  
Profit after tax/ (loss) 5,636 6,588 16.9% 17,565 20,120 14.6%
Net profit margin (%) 27.8% 25.6%   29.7% 26.8%  
No. of shares (m)       1,148 1,148  
Book value per share (Rs)*         124.8  
P/BV (x)         2.2  
* (Book value as on 31st December, 2010)

What has driven performance in 9mFY11?
  • The generation sector comprised the largest allocation of PFC's loan book in 9mFY11 (85%). Private sector projects enjoyed a marginally higher allocation of 7% as compared to 6% in 9mFY10. The company reduced its loans to the state governments, to 65% from 68% previously. Loans to the central sector increased marginally.

  • PFC managed to grow its advances by 27% YoY in 9mFY11. The 45% YoY growth in PFC's disbursements were on the back of an even more impressive 57% YoY growth in sanctions. Being the nodal agency designated by the Government of India for financing power projects in the country, PFC managed to grow its asset book in 9mFY11 at an extremely sharp click. Both PFC's loan growth and net interest margins (NIMs) in 9mFY11 have been in line with our estimates for the fiscal.

    Dynamic growth
    (Rs m) 1HFY10 1HFY11 Change
    Sanctions   389,760   610,770 56.7%
    Disbursements   153,550   222,700 45.0%
    D / S 39% 36%  
    Advances   723,320   920,410 27.2%
           
    Sanctions Breakup
    Generation 72% 67%  
    Transmission 15% 6%  
    Distribution 1% 0%  
    APDRP 7% 20%  
    Others 5% 7%  

  • The company declared an interim dividend of Rs 3.5 per share for FY11. PFC plans to raise additional funds through an FPO (follow on public offer) by April-May 2011. The company intends to raise 15% of its capital through a fresh issue. 5% will be raised towards a government divestment. At current prices this works out to around Rs 65 bn overall.

  • In keeping with its status as an infrastructure financing company, PFC plans to raise Rs 60 bn in tax-free infra bonds to retail investors. This is post similar offerings by <>IDFC and L&T Finance. However, since these bonds cannot be issued at a coupon above government bond yields (approx 8%), and with bank fixed deposits offering 9.5%, marketing these bonds will be a tough task. Tax-adjusted yields will be higher than 8%. But it remains to be seen whether investors are willing to lock their funds for 5 years for the same.

  • PFC's gross NPAs remained negligible at 0.01% while net NPAs were nil, as provisions were in excess of the gross NPAs. The company has always been able to maintain superior asset quality despite a dynamic growth in advances. This is because of its ability to impose penalties in case of default, and withdraw benefits to its customers. Thus, it is able to mould the behavior pattern of its borrowers, so that they do not default.

What to expect?
At the current price of Rs 277.1, the stock is trading very attractively at a multiple of 1.6 times our estimated FY13 adjusted book value. Research pro subscribers can view our latest updates on the company here.

Given the investment opportunities in infrastructure, particularly the power sector, the growth potential for a nodal government agency like PFC is immense given its proximity to the respective Ministries and participation in the policy decisions. The company is also planning to raise capital through an FPO and a tax-free infra bond issue in order to have in place the necessary funds to grow its loan book.

PFC's ability to access long term funding, sustain reasonable margins and superior asset quality set it apart from financial institutions in the public sector. Despite near term concerns about the rise in interest rates, we retain our positive view on the stock from a 2-3 year perspective.

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