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PFC: Transmission gains traction - Views on News from Equitymaster

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PFC: Transmission gains traction

Apr 29, 2010

Power Finance Corp. (PFC) declared its FY10 results. The institution has reported a 22% YoY and 20% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income rises by 22% YoY during FY10 on the back of 24% YoY growth in advances.
  • Bottomline expands by 20% YoY in FY10 aided by exchange rate gains and higher other income. Excluding the exchange rate gains, profits have remained flat over the 12-month period.
  • Fall in profits in 4QFY10 due to the write-back of deferred tax liability in 4QFY09.
  • Net interest margin improved from 3.8% in FY09 to 4.0% in FY10.
  • Net NPA to advances remain negligible at 0.01% at the end of FY10.
  • Capital adequacy ratio (CAR) comfortable 19.2% at the end of FY10.

Consolidated numbers...
Rs (m) 4QFY09 4QFY10 Change FY09 FY10 Change
Income from operations 18,169 20,799 14.5% 65,574 80,021 22.0%
Interest expended 11,596 13,588 17.2% 42,497 50,585 19.0%
Net Interest Income     6,573 7,211 9.7% 23,077 29,436 27.6%
Net interest margin       3.8% 4.0%  
Other Income     29     247 751.7%   261   719 175.5%
Operating expense   82 300 265.9%   496   731 47.4%
Provisions and contingencies 192    98 -49.0%   421   338 -19.7%
Exchange rate (gain) /loss 406 (290)   2,525 (1,038)  
Profit before tax   5,922 7,350 24.1% 19,896 30,124 51.4%
Tax (4,132) 1,363   205 6,571 3105.4%
Effective tax rate   18.5%   1.0% 21.8%  
Profit after tax/ (loss) 10,054 5,987 -40.5% 19,691 23,553 19.6%
Net profit margin (%) 55.3% 28.8%   30.0% 29.4%  
No. of shares (m)     1,148 1,148  
Book value per share (Rs)*         109.9  
P/BV (x)         2.5  
* (Book value as on 31st March 2010)

What has driven performance in FY10?
  • While generation sector comprised the largest allocation of PFC's loan book in FY10, the institution is increasingly lending more to transmission projects that comprised 18% of the loan book in FY10 as against 10% in FY09. Private sector and PPP (public private partnership / joint) projects also enjoyed a higher allocation. This is keeping in mind the higher contribution of private sector to power projects during the 12th plan.

  • PFC managed to grow its advances by nearly 24% YoY in FY10 despite lower average credit growth in the banking sector. The 23% YoY growth in PFC's disbursements were on the back of 15% YoY growth in sanctions. Most of these came in at the latter half of the past fiscal. Being the nodal agency designated by the Government of India for financing power projects in the country, PFC managed to grow its asset book in FY10 faster than the growth in infrastructure sector in the past 9 to 12 months. The difference in sanctions and disbursements is because PFC is a project driven organization. The overall growth in loan book is well in line with our estimates. Also due to better pricing power, the net interest margins improved from 3.8% in FY09 to 4.0% in FY10.
    Balanced growth...
    (Rs m) FY09 FY10 Change
    Sanctions 570,300   654,660 14.8%
    Disbursements   210,540   258,080 22.6%
    D / S 37% 39%  
    Advances   644,290   798,560 23.9%
    Generation 78% 67%  
    Transmission 10% 18%  
    Distribution 3% 1%  
    APDRP 3% 10%  
    Others 6% 4%  

  • PFC's other income grew by 176% YoY in FY10 primarily because the company has derived a lumpsum fees on its consulting business for UMPPs (ultra mega power projects). This kind of growth is not sustainable and will remain lumpy in future as well. Further, the institution's UMPP consulting business has now moved to a separate entity PFC Consulting.

  • PFC's gross NPAs also remained negligible at 0.02% while net NPAs are 0.01% of advances in FY10.

What to expect?
At the current price of Rs 274, the stock is trading at a multiple of 2.5 times our estimated FY12 adjusted book value. Given the investment opportunities in infrastructure segment, particularly power, 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 hardening of interest rates, however, increases the likelihood of bad debts. PFC's ability to access long term funding, sustain reasonable margins and good asset quality sets it apart from financial institutions in the private sector. We retain our positive view on the stock.

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