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PFC: Project pipeline buoys performance - Views on News from Equitymaster
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PFC: Project pipeline buoys performance
Feb 1, 2010

Performance summary
  • Net interest income rises by 35% YoY during 9mFY10 on the back of 20% YoY growth in advances.
  • Bottomline expands by 82% YoY in 9mFY10 aided by exchange rate gains and higher other income. Excluding the exchange rate gains, profits have grown by 43% YoY in 9mFY10.
  • Net interest margin improved from 3.8% in 9mFY09 to 4.2% in 9mFY10.
  • Net NPA to advances remain negligible at 0.01% at the end of 9mFY10.
  • Capital adequacy ratio (CAR) comfortable 16.2% at the end of 9mFY10.
  • ROE improves from 14% in 9mFY09 to 20% in 9mFY10.


Consolidated numbers...
Rs(m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Income from operations 17,160 20,277 18.2% 47,404 59,222 24.9%
Interest expended 11,287 12,714 12.6% 30,901 36,997 19.7%
Net Interest Income 5,873 7,563 28.8% 16,503 22,225 34.7%
Net interest margin       3.8% 4.2%  
Other Income 41 22 -46.3% 233 471 102.1%
Operating expense 218 242 11.0% 604 643 6.5%
Provisions and contingencies 11 10 -9.1% 30 29 -3.3%
Exchange rate (gain) /loss 683 (295)   2,119 (749)  
Profit before tax 5,002 7,628 52.5% 13,983 22,773 62.9%
Tax 1,612 1,991 23.5% 4,336 5,208 20.1%
Effective tax rate 32.2% 26.1%   31.0% 22.9%  
Profit after tax/ (loss) 3,390 5,637 66.3% 9,647 17,565 82.1%
Net profit margin (%) 19.8% 27.8%   20.4% 29.7%  
No. of shares (m)       1,148 1,148  
Book value per share (Rs)*         108.0  
P/BV (x)         2.2  
* (Book value as on 31st December 2009)

What has driven performance in 9mFY10?
  • With a higher proportion of its incremental disbursements going to the central government and private sector power projects, PFC managed to grow its advances by nearly 20% YoY so far in FY10 despite lower average credit growth in the banking sector. The 9% YoY growth in PFCs disbursements were despite 10% YoY fall 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 9mFY10 despite the slowdown in infrastructure sector in the past 9 to 12 months. The difference in sanctions and disbursements is because PFC is a project driven organization. The overall growth in loan book is well in line with our estimates. Also due to better pricing power, the net interest margins improved from 3.8% in 9mFY09 to 4.2% in 9mFY10.

    Cautious growth
    (Rs m) 9mFY09 9mFY10 Change
    Sanctions 431,310 389,760 -9.6%
    Disbursements 141,010 153,550 8.9%
    D / S 33% 39%  
    Advances 604,410 724,410 19.9%
    Breakup
    Generation 74% 76%  
    Transmission 7% 5%  
    Distribution 3% 2%  
    APDRP 0% 5%  
    Others 16% 12%  

  • While generation sector comprised the largest allocation of PFCs loan book in 9mFY10, the institution is increasingly lending more to private sector and PPP (public private partnership / joint) projects.

  • PFCs other income grew by 102% YoY in 9MFY10 primarily because the company has derived a lumpsum fees on its consulting business for UMPPs (ultra mega power projects). This kind of growth is not sustainable and will remain lumpy in future as well. Further, the institutions UMPP consulting business has now moved to a separate entity PFC Consulting.

  • PFCs gross NPAs also remained negligible at 0.02% while net NPAs are 0.01% of advances in 9mFY10.

What to expect?
At the current price of Rs 242, the stock is trading at a multiple of 2.2 times our estimated FY12 adjusted book value. Given the investment opportunities in infrastructure segment, particularly power, 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 hardening of interest rates, however, increases the likelihood of bad debts. PFCs ability to access long term funding, sustain reasonable margins and good asset quality sets it apart from financial institutions in the private sector. Having said that, we believe that at the current price the stock factors in most of the near term upsides. Investors are therefore advised to practice caution.

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