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PFC: NIMs expand but qtly profits flat - Views on News from Equitymaster

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PFC: NIMs expand but qtly profits flat
Feb 11, 2013

Power Finance Corp. (PFC) declared its results for the third quarter of the financial year 2012-13 (3QFY13). The institution has reported a 36% YoY and 1% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Income from operations rises by 36% YoY during 3QFY12 and 35%YoY for the nine month period on the back of a 26% YoY growth in advances.
  • Bottomline expands by 41% YoY in 9mFY13 due to higher NII (net interest income) and lower expenses. However for the 3QFY13 profits were up only 1% on flat NII growth and lower other income.
  • Net interest margin improve significantly to 4.4% in 9mFY13 from 3.9% in 9mFY12.
  • Net NPA to advances increases to 0.82% at the end of 9mFY13, compared to 0.42% in 9mFY12 and 0.93% in FY12.
  • Capital adequacy ratio (CAR) stands at 18.1% at the end of 9mFY13.

Standalone performance snapshot
Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Income from operations 32,824 44,654 36.0% 93,319 125,968 35.0%
Interest expended 17,813 29,168 63.7% 63,239 82,587 30.6%
Net Interest Income 15,011 15,485 3.2% 30,080 43,381 44.2%
Net interest margin       3.9% 4.4%  
Other Income 13 8 -36.4% 209 55 -73.9%
Operating expense 276 373 35.3% 847 982 16.0%
Provisions and contingencies 14 15 12.5% 38 43 11.8%
Profit before tax 14,734 15,105 2.5% 29,405 42,411 44.2%
Tax 3,655 3,934 7.6% 7,270 11,156 53.4%
Effective tax rate 24.8% 26.0%   24.7% 26.3%  
Profit after tax/ (loss) 11,079 11,171 0.8% 22,134 31,255 41.2%
Net profit margin (%) 33.8% 25.0%   23.7% 24.8%  
No. of shares (m)         1,320  
Book value per share (Rs)*         150.1  
P/BV (x)         1.5  
* (Book value as on 31st December, 2012)

What has driven performance in 9mFY13?
  • The generation sector comprised the largest allocation of PFC's loan book in 9mFY13 (82%). Private sector projects enjoyed a higher allocation of 12% as compared to 10% in 9mFY12. The institution has put in place additional checks for private sector lending. However this increase is in keeping with the increased capacity addition expected from the private sector. The company kept its loans to the state governments at 64%. Loans to the central sector stood at 16%.

  • PFC managed to grow its advances by 25.6% YoY in 9mFY13 despite lower average credit growth in the banking sector. This was on account of the strong pipeline in existing sanctions that the company has built over the years. Even with a slowdown in infrastructure activity in the country, especially in the power sector, the growth in new sanctions picked up and increased by 45.5% on a YoY basis. PFC saw a 25% YoY growth in disbursements. The institution has total outstanding sanctions of Rs 1.7 trillion. 42% of these sanctions already have their documents executed and disbursement has commenced.

    Loans see growth on existing sanctions
    (Rs m) 9mFY12 9mFY13 Change
    Sanctions 409,580 595,740 45.5%
    Disbursements 241,260 301,750 25.1%
    D / S 59% 51%  
    Advances 1,179,900 1,481,410 25.6%
    Sanctions Breakup
    Generation 69% 46%  
    Transmission 4% 12%  
    Distribution 15% 2%  
    Others 12% 40%  

  • PFC was able to improve its margins to 4.4% from 3.9% in 9mFY12. This was on the back of higher yields, to counter the increasing cost of funds. The spreads (difference between lending rate and costs) have also improved to 2.8% in 9mFY13 from 2.2% earlier. Provided that the central bank keeps its rates steady, the institution will be able to improve its spreads and thus margins.

  • PFC's gross NPAs increased to 0.92% from 0.54% previously, but came in lower versus the 1.04% levels seen in March. Net NPAs are 0.82% of advances in 9mFY13, from 0.48% seen at the end of 9mFY12, however there hasn't been a further slippage in asset quality since March. The Reserve Bank of India (RBI) has asked PFC to create a standard provision of 0.25% against standard assets. However the company already has a significant loan loss reserve of around 1% of its book. PFC will however comply with this 0.25% provision against standard assets over the next 3 years at the rate of 0.08% per year. This 0.08% provisioning for the first nine months, worked out to Rs 920 m. An additional provisioning of Rs 300 m will be undertaken next quarter for the same.

  • PFC paid an all time high interim dividend of Rs 6 per share, implying a dividend yield of around 2.7%. The government netted Rs 5.8 bn in interim dividend from PFC as per its 73.7% stake in the company. PFC's capital adequacy ratio (CAR) stands at 18.1% at the end of 9mFY13 with a tier 1 ratio of 16.98%.

What to expect?
At the current price of Rs 218.5, the stock is trading at a multiple of 1.1 times its FY15 adjusted book value. There have been numerous issues including policy inaction, environmental clearances, and concerns on the financial health of state electricity boards. However there has been some traction with regards to these issues. This includes the financial restructuring plan for state discoms and the government is expected to have the final say in disputed arising out of Fuel Supply Agreement (FSA) by both public and private sector power companies.

The company however has a large outstanding sanction book of Rs 1.6 trillion, which are pending disbursement. New sanctions have gained momentum and PFC was able to see a 26% growth in its loan book in 9mFY13. It has seen a 20%+ growth over the past three years. On the asset quality front, PFC hasn't seen a further deterioration in the same since FY12.

Nevertheless, the institution has far superior asset quality versus most banks in the public or private space. Over the past 25 years it has not had any bad debts written off in the state sector. 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. It has not restructured any SEB (State Electricity Board) debt as such. Plus it is implementing a standard asset provisioning of 0.25% over the next 3 years which will hold it in good stead going forward in case there are any slippages.

Lower or steady interest rates going forward should also help PFC manage its margins and spreads in a better manner as most of its liabilities are at floating, while assets are fixed rate. On account of a better than expected performance from the company on the growth as well as the asset quality front we reiterate our Hold rating on the stock as mentioned in the December 2012 quarterly performance review. We will update our new target price on the stock shortly.

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