PFC: Growth not flowing to the bottomline

Power Finance Corp. (PFC) declared its FY11 (financial year 2011) results. The institution reported a 27% YoY and 11% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary

• Net interest income rises by 24% YoY during FY11 on the back of 25% YoY growth in advances.
• Bottomline (profits) grows by a muted 11% YoY in FY11, on the back of a fall in other income and higher tax outlay.
• Net interest margin improves marginally from 4.0% in FY10 to 4.1% in FY11.
• Net NPA (non-performing assets) to advances stood at 0.2% at the end of FY11

Consolidated numbers...

Rs (m)	4QFY10	4QFY11	Change	FY10	FY11	Change
Income from operations	20,799	26,173	25.8%	80,021	101,285	26.6%
Interest expended	13,580	17,906	31.9%	50,585	64,925	28.3%
Net Interest Income	7,220	8,267	14.5%	29,436	36,360	23.5%
Net interest margin				4.0%	4.1%
Other Income	277	61	-78.1%	748	321	-57.1%
Operating expense	415	293	-29.4%	1,049	934	-11.0%
Provisions and contingencies	9	14	56.4%	38	51	32.5%
Exchange rate (gain) /loss	(290)	(173)		(1,038)	264
Profit before tax	7,362	8,194	11.3%	30,135	35,433	17.6%
Tax	1,355	2,127	57.0%	6,562	9,245	40.9%
Effective tax rate	18.4%	26.0%		21.8%	26.1%
Profit after tax/ (loss)	6,008	6,067	1.0%	23,572	26,188	11.1%
Net profit margin (%)	28.9%	23.2%		29.5%	25.9%
No. of shares (m)				1,148	1,148
Book value per share (Rs)*					134.3
P/BV (x)					1.8

* (Book value as on 31st March 2011)

What has driven performance in FY11?

• The generation sector comprised the largest allocation of PFC's loan book in FY11 (84%). Private sector projects enjoyed a marginally higher allocation of 7%, compared to 5% in FY10. The company reduced its loans to the state governments to 65% from 68% previously. Loans to the central sector increased marginally.

• PFC managed to grow its advances by 25% YoY in FY11. But, in keeping with the overall slowdown in the power sector, growth saw a slight tapering off versus performance in the 9 month period ended December, 2010 (9mFY11). The financier saw a 32% YoY growth disbursements. Both PFC's loan growth and net interest margins (NIMs) in FY11 came in line with our estimates for the fiscal. Balanced growth

  (Rs m)	FY10	FY11	Change
  Disbursements	258,080	341,213	32.2%
  Advances	798,558	995,707	24.7%
  Loans Breakup
  Generation	84%	84%
  Transmission	8%	8%
  Distribution	4%	5%
  Others	4%	3%

  
  
• In order to ramp up its capital adequacy ratio, PFC entered the markets with an Rs 47 bn FPO in May 2011. This capital addition will be adjusted in the current financial year FY12.

• In keeping with its status as an infrastructure financing company, PFC floated tax-free bonds to retail investors. It raised Rs 2.4 bn through the same in FY11. For the FY11 fiscal and 4QFY11 its interest expense grew at a quicker pace versus its interest income. This was on account of rising interest rates as well as the public issue of these tax free bonds as well as ECBs (external commercial borrowings). In addition PFC saw a foreign exchange loss of Rs 264 m, compared to a 1 bn forex gain in FY10. This also contributed to a weaker bottom line.

• PFC's gross NPAs increased to 0.2% of its total loans at the end of FY11, compared to 0.02% at the end of FY10. Net NPAs were 0.2% at the end of the fiscal. The increase in gross NPAs was due to the classification of a lease to a private sector wind power developer as NPA.

What to expect?

At the current price of Rs 239, the stock is trading at a multiple of 1.3 times our estimated FY13 adjusted book value. Research pro subscribers can view our latest updates on the company here

Given the investment opportunities in infrastructure, particularly the power sector, 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 company also recently managed to raise additional capital through an FPO. Its status as an infrastructure financing company, which enables it to borrow through ECBs will also help bring in the necessary funds to help grow its loan book.

PFC's ability to access long term funding, sustain reasonable margins and superior asset quality set it apart from financial institutions in the public sector. We believe that the increase in NPAs in FY11 was also a one-off occurrence. Despite near term concerns about the rise in interest rates and slow down in the power sector, we retain our positive view on the stock. This is from a 2-3 year perspective, on account of the reasonable valuations it is trading at. However, we need to incorporate the final FPO pricing, as well as lower loan growth projections in our forward estimates, which will be updated shortly.