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Power Finance Corp: NIMs remain flat - Views on News from Equitymaster
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Power Finance Corp: NIMs remain flat
Mar 5, 2015

Power Finance Corp. (PFC) declared its results for the third quarter (3QFY15) and nine months (9MFY15) of the financial year 2014-15. The company has reported a 16.1% YoY and 0.5% YoY growth in income from operations and net profits respectively. Here is our analysis of the results.

Performance summary
  • Income from operations rises by 16.1% YoY during 3QFY15.
  • Bottom-line expands by 0.5% YoY in 3QFY15 due to a fall in other income (-45.5% YoY) and rise in operating expenses (+100.5% YoY).
  • Net interest margins have remained flat at 5% in 3QFY15.
  • Net NPA to advances increases to 0.75% at the end of 3QFY15, compared to 0.52% in 3QFY14.
  • Capital adequacy ratio (CAR) stands at healthy 21.05% as at the end of 3QFY15.

Standalone Financial Performance Snapshot
Rs (m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Income from operations 55,405 64,347 16.1% 158,901 186,577 17.4%
Interest expended 34,523 42,059 21.8% 101,905 122,999 20.7%
Net Interest Income 20,883 22,287 6.7% 56,995 63,579 11.6%
Net interest margin 4.9% 5.0%   4.9% 4.9%  
Other Income 68 37 -45.5% 113 136 19.9%
Operating expense 389 780 100.5% 1,405 1,886 34.2%
Depreciation & Amortization 12 15 17.7% 37 45 21.0%
Profit before tax 20,549 21,529 4.8% 55,667 61,784 11.0%
Tax 5,206 6,112 17.4% 15,603 17,798 14.1%
Effective tax rate 25.3% 28.4%   28.0% 28.8%  
Profit after tax/ (loss) 15,343 15,417 0.5% 40,063 43,986 9.8%
Net profit margin (%) 27.7% 24.0%   25.2% 23.6%  
No. of shares (m)         1,320  
Book value per share (Rs)*         241.9  
P/BV (x)         1.2  
Source: * (Book value as on 30th December, 2014)

What has driven performance in 3QFY15?
  • PFC reported modest improvement in performance during the quarter gone by. While interest income reported a strong growth, profits were flat on a YoY basis. While income performance stood healthy, provisions stood on the higher side restricting a healthy profitability for the company. Asset quality deteriorated (reflected by a rise in NPAs) during the quarter.

  • Loan assets increased 15.8% YoY. The generation segment has contributed highest to the total sanctions and the disbursements with the state sector having the highest share.

  • Outstanding sanctions pipeline stands at Rs 1.7 trillion. Expansion in spreads (3.47% in 3QFY15 versus 3.43% in 3QFY14) supported by healthy interest income performance has enabled the company to maintain stable NIMs.

  • The borrowing profile of the company is .characterized by money raised through bonds that contribute almost 84% to PFCs borrowings. Term loans contribute 14% of the borrowings. Foreign currency loans account for 6% of the total borrowings and as such are not much of a concern.

  • The bad loans piled up with gross NPAs spiking up to 0.96% in 3QFY15 from 0.65% a year ago. The provisions for the quarter also have moved up and continue to remain on the higher side. This tells us that the company might be vulnerable to asset quality risks in future.
What to expect?

At the current price of Rs 302, the stock is trading at a multiple of 1.2 times its current book value.

Despite healthy growth in assets (+15.8% YoY) and stable margins (NIMs stand at 5%) earnings performance this quarter for Power Finance Corp (PFC) was muted. For one, cost of funds has risen marginally. However, there was a simultaneous increase in asset yields that helped maintain NIMs at stable levels. However, a fall in other income (-45.5% YoY) and rise in operating expenses (+100.5% YoY) impacted bottomline growth.

Consistent business growth, stable earnings, robust return ratios 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.

Since the last update we have rolled forward our target price to FY17 which now stands at Rs 387 per share. While this represents a decent upside from current levels we believe the issues in the power sector are not going to disappear overnight and it may take some time before improved sentiments really translate into earnings growth. Thus, while there is a valuation comfort at these levels we choose to remain circumspect.

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