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Power Finance Corp.: Growth with quality - Views on News from Equitymaster

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Power Finance Corp.: Growth with quality
Feb 26, 2014

Power Finance Corp. (PFC) declared its results for the third quarter (3QFY14) of the financial year 2013-14. The institution has reported a healthy 34.8% YoY and 37.3% YoY growth in net interest income and net profits respectively. For the 9mFY14, the profits have gone up by 28.2% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) rises by healthy 34.8% YoY during 3QFY14 on the back of strong 20% YoY growth in loan assets and expansion in spreads.
  • Bottom-line expands by robust 37.3% YoY in 3QFY14 due to higher core interest income, whopping growth in other income, and lower provisions.
  • Net interest margins improve significantly to 4.9 % in 3QFY14 from 4.6% in 3QFY13.
  • Net NPA to advances decreases to 0.52% at the end of 3QFY14, compared to 0.82% in 3QFY13.
  • Capital adequacy ratio (CAR) stands at healthy 18.9% as at the end of 3QFY14.

Standalone earnings performance
Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Income from operations 44,654 55,392 24.0% 125,968 158,863 26.1%
Interest expended 29,168 34,523 18.4% 82,587 101,905 23.4%
Net Interest Income 15,485 20,870 34.8% 43,381 56,958 31.3%
Net interest margin 4.6% 4.9%   4.4% 4.9%  
Other Income 8 81 885.4% 55 151 175.6%
Operating expense 373 389 4.3% 982 1,405 43.0%
Provisions and contingencies 15 12 -19.0% 43 37 -12.7%
Profit before tax 15,105 20,549 36.0% 42,411 55,667 31.3%
Tax 3,934 5,206 32.3% 11,156 15,603 39.9%
Effective tax rate 26.0% 25.3%   26.3% 28.0%  
Profit after tax/ (loss) 11,171 15,343 37.3% 31,255 40,063 28.2%
Net profit margin (%) 25.0% 27.7%   24.8% 25.2%  
No. of shares (m)         1,320  
Book value per share (Rs)*         186.4  
P/BV (x)         0.6  
* (Book value as on 31st December, 2013)

What has driven performance in 3QFY14?
  • Healthy growth in assets and improvement in margins drove the profitability for the December quarter of 2013. Moreover, the NPA addition remains zero and the asset quality stands under control. Overall, 3QFY14 proved to be a healthy quarter for PFC.

  • The loan assets for the company have grown by strong 20% YoY, with sanctions pipeline remaining benign (outstanding sanctions stand at Rs 1720 bn). The sanctions for the quarter have grown robust by 36% YoY including transitional loans. The generation segment continues to contribute higher to the sanctions pipeline of the company. The disbursements, however, were seen down by 3.2% YoY. Excluding transitional loans, the disbursements have grown by healthy 31% YoY.

    Segment-wise performance (Consolidated)
    (Rs m) 3QFY13 3QFY14 Change
    Sanctions 181,440 246,290 35.7%
    Disbursements 126,210 122,150 -3.2%
    D / S 70% 50%  
    Advances 1,482,820 1,774,990 19.7%
    Sanctions Breakup
    Generation 69% 66%  
    Transmission 19% 2%  
    Distribution 0% 6%  
    Others 12% 26%  

  • The margins for the quarter stood on the higher side on account of expansion in interest spreads. This can be attributed to the reduced cost of borrowings, fresh disbursements at higher rates and re-pricing of existing loan assets at higher rates. The net interest margins (NIMs) for 3QFY14 stood at 4.9% as against 4.6% in 3QFY13. With improvement in margins, the net interest income (NII) for the company witnessed 34.8% growth YoY.

  • The provisions for the quarter came down by 19.0% YoY. The asset quality remains under control with reduction in gross NPAs to 0.65% in 3QFY14 from 0.92% in 3QFY13. On similar lines, the net NPAs were seen down to 0.52% in 3QFY14 from 0.82% in 3QFY13. On sequential basis, the NPAs were down marginally as at the end of December quarter. There were zero additions to NPAs during the quarter.

  • The lower operating costs, lower provisions and higher other income proved to be major drivers for profitability growth for the December quarter of 2013. The profits for the quarter stood at Rs 15.3 bn reporting whopping 37.3% YoY growth.

  • The capital adequacy ratio at 31 December, 2013 stands at 18.86% against RBI prescribed limit of 15%.
What to expect?

At the current price of Rs 156, the stock is trading at a multiple of 0.6 times our FY16 adjusted book value.

Consistent business growth, stable earnings and robust return ratios, controlled asset quality and capital sufficiency makes up to a resilient balance sheet for PFC. Moreover, the borrowing profile of the company stands robust and the resource mobilization at competitive rates takes care of the funding side of the balance sheet. This together reinforces our belief that PFC is a long-term play.

However, power sector issues stand looming too. The exposure to cash-strapped state utilities does not completely rule out the asset quality concerns. That said, the sector is witnessing daylight in recent periods with the accelerated reforms in place, increased momentum in fuel supply agreements, expectation of further tariff hikes by state power distribution companies and the recent financial restructuring plan (FRP) for state discoms and disputes resolution with respect to Fuel Supply Agreement (FSA) allaying concerns of power financiers. Therefore, we continue to maintain BUY recommendation on the stock. Having said that, we remain cognizant about the chronic power sector issues, closely gauge the sector developments and account for sufficiently conservative estimates.

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