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PFC: Qtly profits jump on new accounting rule - Views on News from Equitymaster

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PFC: Qtly profits jump on new accounting rule

Feb 7, 2012

Power Finance Corp. (PFC) declared its results for the third quarter of the financial year 2011-12 (3QFY11). The institution has reported a 27% YoY and 68% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Income from operations rises by 27% YoY during 3QFY12 and 24%YoY for the nine month period on the back of a similar growth in advances (28% YoY).
  • Bottomline expands by 10% YoY in 9mFY12 due to exchange rate losses, lower other income and pressure on NII (net interest income). However for the 3QFY12 profits were up 68% on forex gains.
  • Net interest margin decreased marginally to 3.9% in 9mFY12 from 4.1% in 9mFY11.
  • Net NPA to advances increases to 0.54% at the end of 9mFY12, compared to 0.01% in 9mFY11 and 0.23% in 1HFY12.
  • Capital adequacy ratio (CAR) stands at 17.9% at the end of 9mFY12.
  • The board declares an interim dividend of Rs 5 per share.

Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Income from operations 25,757 32,824 27.4% 75,111 93,319 24.2%
Interest expended 16,227 21,966 35.4% 47,018 61,341 30.5%
Net Interest Income  9,530 10,857 13.9% 28,093 31,979 13.8%
Net interest margin       4.1% 3.9%  
Other Income 55 13 -76.4% 260 209 -19.6%
Operating expense 277 276 -0.5% 641 847 32.1%
Provisions and contingencies 12 14 9.3% 37 38 4.0%
Exchange rate (gain) /loss 280 (4,153)   437 1,899 334.6%
Profit before tax 9,015 14,734 63.4% 27,239 29,405 8.0%
Tax 2,426 3,655 50.6% 7,118 7,270 2.1%
Effective tax rate 26.9% 24.8%   26.1% 24.7%  
Profit after tax/ (loss) 6,588 11,079 68.2% 20,120 22,134 10.0%
Net profit margin (%) 25.6% 33.8%   26.8% 23.7%  
No. of shares (m)         1,320  
Book value per share (Rs)*         150.1  
P/BV (x)         1.2  
* (Book value as on 31st December, 2011)

  • The generation sector comprised the largest allocation of PFC's loan book in 9mFY12 (84%). Private sector projects enjoyed a higher allocation of 10% as compared to 7% in 9mFY11. The institution has put in place additional checks for private sector lending. However this increase is keeping in mind the increased capacity addition expected from the private sector. The company reduced its loans to the state governments, to 63% from 65% previously. Loans to the central sector remained constant at 19%.

  • PFC managed to grow its advances by 28% YoY in 9mFY12 despite lower average credit growth in the banking sector. However, with a slowdown in infrastructure activity in the country, especially in the power sector, the growth in new sanctions was dismal. PFC saw a muted 14% YoY growth in disbursements. However sanctions fell by 26% YoY. Thus most of the incremental loans came from the existing pipeline. The institution has total outstanding sanctions of Rs 1.8 trillion. 47% of these sanctions already have their documents executed and disbursement has commenced.

    Loans see growth on existing sanctions
    (Rs m) 9mFY11 9mFY12 Change
    Sanctions 610,770 452,400 -25.9%
    Disbursements 222,700 254,760 14.4%
    D / S 36% 56%  
    Advances 921,180 1,179,950 28.1%
    Sanctions Breakup
    Generation 67% 62%  
    Transmission 6% 4%  
    Distribution 0% 5%  
    APDRP 20% 19%  
    Others 7% 10%  

  • PFC's other income fell by 20% YoY in 9mFY12 primarily because the company received lower fees on its consulting business for UMPPs (ultra mega power projects), lease income etc. The company saw a huge increase in quarterly profits mainly on account of a change in accounting standards on recognition of forex translation gains/losses. For accounting for foreign currency translation, PFC has opted for amortizing the foreign exchange fluctuation over the balance sheet period of these borrowings. Had the company followed the earlier practice of accounting for exchange differences, the net profit for the quarter would have been higher by a relatively muted 17%, instead of the 68% growth seen. Going forward this account change should lead to less fluctuation on the P&L account and give a more accurate picture of the financials.

  • The company's has proposed to launch a private equity fund of US$ 1 billion, which could be put in place over the next few months. It may partner with Edelweiss Financial Services for the same. The fund is to be established on a partnership basis, with PFC owning 49% of the fund, while 51% with the partner. The fund will begin with US$ 300 m in investments and PFC's contribution will be 5% of the total. The fund size would be increased to US$ 1 trillion in tranches.

  • PFC's gross NPAs increased to 0.54% while net NPAs are 0.48% of advances in 9mFY12, from 0.01% seen at the end of 9mFY11. The increase in NPA levels was on account of non-performing assets of Konaseema Gas Power project which has defaulted on payments. A provision of Rs 3.9 bn was taken on the same and an income reversal of Rs 190 m. This is in addition to the NPA's of a private sector wind power project which was classified as an NPA in 4QFY11. The Maheshwar Hydroelectric project which was declared as an NPA by REC is still classified as performing by PFC, as it has a special dispensation from the RBI till March '12. Thus there may be some further stress on this account. The institution however has minimal restructuring risks for its borrowings as it lends on a project specific basis, and does not give its customers an option to change the terms and conditions of the debt.

What to expect?
At the current price of Rs 187, the stock is trading at an attractive multiple of 1 time our estimated FY14 adjusted book value. PFC has corrected significantly since last year on account of various concerns on execution of power projects. There have been numerous issues including policy inaction, environmental clearances, and concerns on the financial health of state electricity boards. However, with the new policy plan in place (Shunglu Committee), we expect there to be some improvement in the sector, but this may take some time to get implemented. So far seven states have increased tariffs between 2-22%. There have been talks with Coal India about fuel supply agreements and with the RBI for creation of a special purpose vehicle of purchase distressed assets of banks and FIs. Irrespective, we have been extremely conservative in our estimates for FY13, and we expect a very flattish growth in the loan book on account of a slowdown in sanctions this year. On the plus side, the company however has a large outstanding sanction book of Rs 1.8 trillion, which are pending disbursement. Thus, even with a slowdown in new sanctions, PFC was still able to see a 28% growth in its loan book in 9mFY12. Plus it has seen a 20%+ growth over the past three years. The profit numbers have come ahead of our estimates especially on account of the new forex rules, thus we will have to revise our profit estimates for FY12 slightly upwards. Having said that forex gains / losses are extraordinary items and we make estimates for them only on conservative basis.

On the asset quality front, we need to factor in some further deterioration. Nevertheless, the institution has far superior asset quality versus most banks in the public or private space. Also, the management does not expect significant deterioration in asset quality going forward on account of government guarantees, and the escrow mechanism. It also doesn't restructure terms and conditions of its advances as it lends on a project specific basis. The company is also adequately capitalized post its FPO. PFC is also planning to access other funding sources though medium term notes and infrastructure bonds in the current financial year. However, on account of frequent equity dilution necessary to maintain a 15% capital adequacy ratio, and a growth slowdown in the sector leading to lower profitability, we expect the company's return on equity (ROE) to be depressed for the next few years. RBI's monetary easing should also help the institution manage its margins and spreads in a better manner as most of its liabilities are floating, while assets are fixed rate. From at the current valuation the stock continues to offer attractive returns over a 2 to 3 year period. We reiterate out BUY rating on the stock.

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