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PFC: Advance growth remains strong
May 22, 2012

Power Finance Corp. (PFC) declared its FY12 (financial year 2012) results. The institution reported a 17% YoY and 16% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income rises by 17% YoY during FY12 on the back of 31% YoY growth in advances.
  • Bottomline (profits) grows by a muted 15.7% YoY in FY12, on the back of a fall in other income and relatively muted growth in net interest income (NII). For 4QFY12, profits were up 35% on the back of strong NII growth.
  • Net interest margin falls marginally to 3.9% in FY12 from 4% in FY11.
  • Net NPA to advances increases to 0.9% at the end of FY12, compared to 0.2% in FY11 and 0.23% in 1HFY12.
  • Capital adequacy ratio (CAR) stands at 16.3% at the end of FY12.
  • PFC declared a final dividend of Re 1 per share (total Rs 6 for the year), implying a dividend yield of 4%.

Rs (m) 4QFY11 4QFY12 Change FY11 FY12 Change
Income from operations 26,174 36,829 40.7% 101,285 130,149 28.5%
Interest expended 17,732 24,796 39.8% 65,188 88,035 35.0%
Net Interest Income 8,441 12,034 42.6% 36,097 42,114 16.7%
Net interest margin       4.0% 3.9%  
Other Income 61 14 -77.6% 321 223 -30.6%
Operating expense 285 393 37.7% 926 1,240 33.8%
Provisions and contingencies 14 16 16.5% 51 54 7.3%
Profit before tax 8,203 11,638 41.9% 35,441 41,043 15.8%
Tax 2,127 3,455 62.4% 9,246 10,725 16.0%
Effective tax rate 25.9% 29.7%   26.1% 26.1%  
Profit after tax/ (loss) 6,075 8,183 34.7% 26,196 30,317 15.7%
Net profit margin (%) 23.2% 22.2%   25.9% 23.3%  
No. of shares (m)         1,320  
Book value per share (Rs)*         147.7  
P/BV (x)         1.0  
* (Book value as on 31st March 2012)

What has driven performance in FY12?
  • The generation sector comprised the largest allocation of PFC's loan book in FY12 (83%). Private sector projects enjoyed a higher allocation of 11%, compared to 7% in FY11. The institution has put in place additional checks for private sector lending. However this increase is keeping in mind the increased capacity addition expected from the private sector during the next 5 year plan. The company reduced its loans to the state governments to 63% from 65% previously. Loans to the central sector decreased marginally.

  • PFC was able to maintain its margins close to last year's level of 4%. 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 remained above 2%.

  • PFC managed to grow its advances by 31% YoY in FY12. This came in despite lower average credit growth in the banking sector of 16%. However, with a slowdown in infrastructure activity in the country, especially in the power sector, the growth in new sanctions was dismal, falling 14% on a YoY basis. However, sanctions saw a pick up in the final quarter of FY12, as sanctions increased by 43% since December 2011. PFC saw a 21% YoY growth in disbursements, on existing sanction pipeline. The institution has total outstanding sanctions of Rs 1.8 trillion. 46% of these sanctions already have their documents executed and disbursement have commenced.

  • The firm has a target to sanction Rs 462 bn and disburse Rs 430 bn for projects in FY13, however these seem to be conservative estimates based on the performance in the power sector last year and the current investment climate. However the financier has a large pipeline of sanctions which still need to be disbursed, thus it plans to go slow on fresh approvals. PFC is looking to expand its business activities over the next few months. It is exploring the possibility of funding coal mines and gas stations, both in India as well as overseas.

  • PFC's other income fell by 31% YoY in FY12 primarily because the company received lower fees on its consulting business for UMPPs (ultra mega power projects), lease income etc.

    Loans see growth on existing sanctions
    (Rs m) FY11 FY12 Change
    Sanctions 751,970 647,520 -13.9%
    Disbursements 341,210 414,180 21.4%
    Advances 996,010 1,302,090 30.7%
           
    Loans Breakup
    Generation 85% 83%  
    Transmission 8% 8%  
    Distribution 5% 4%  
    Others 3% 6%  

  • In FY12 PFC raised Rs 360 bn, including Rs 50 bn through tax-free bonds to retail investors. In FY13, it plans to raise Rs 405 bn. It also plans to go for an external commercial borrowing worth US$ 250 m. While raising money from overseas, the company compares the fully hedged costs of borrowing abroad versus the domestic rate and only then decides whether it is favourable to go for it or not. The company's capital adequacy is currently 16.3%, thus it may go in for some Tier 2 bonds in the current fiscal to boost its capital base.

  • PFC's gross NPAs increased to 1.04% of its total loans at the end of FY12, compared to 0.23% at the end of FY11. Net NPAs were 0.93% at the end of the fiscal, compared to 0.2% earlier. The special dispensation that the RBI had granted the company for the Maheshwar Hydroelectric project expired as of March '12, thus it had to classify the same as an NPA. The management is confident that there will be no further stress on asset quality, especially if Coal India supplies 80% of fuel needs. PFC sees the penalty that Coal India has to pay as a positive sign as it shows a commitment from the government for improvement in the space. Much needed tariff hikes which the state electricity boards have undertaken recently will also help improve the financial health of these entities. PFC however has minimal restructuring risks for its borrowings as it lends on a project specific basis, and does not give its customers an option to change the terms and conditions of the debt.

What to expect?
At the current price of Rs 147.1, the stock is trading at a multiple of 0.8 times our estimated FY14 adjusted book value. PFC has corrected significantly since last year on account of various concerns on execution of power projects. There have been numerous issues including policy inaction, environmental clearances, and concerns on the financial health of state electricity boards. However, with the new policy plan in place (Shunglu Committee), we expect there to be some improvement in the sector. But this may take some time to get implemented. So far a few states have increased tariffs levels. However, power sector losses are still accumulating as these increases may be too little, too late. Further hikes are needed to bridge the revenue gaps of the discoms. PFC believes that the weightage of the state segment in the power sector will go down over the next few years as the private sector continues to gain traction. The company has also been seeing increase allocation to the private space. Coal India's commitment to supply 80% of its commitment, failing which it will have to pay a penalty may also somewhat help address the fuel supply issue.

We have been extremely conservative in our estimates for FY13, and we expect a very flattish growth in the loan book on account of a slowdown in sanctions this year. On the plus side, the company however has a large outstanding sanction book of Rs 1.8 trillion, which are pending disbursement. Thus, even with a slowdown in new sanctions, PFC was still able to see a 31% growth in its loan book in FY12. It has seen a 20%+ growth over the past three years. Profit numbers as well as advance growth came ahead of our more conservative estimates.

On the asset quality front, we need to factor in some further deterioration on account of the Maheshwar Project. 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. Reserve Bank of India (RBI) monetary easing should also help the institution manage its margins and spreads in a better manner as most of its liabilities are floating, while assets are fixed rate. From at the current valuation the stock continues to offer attractive returns over a 2 to 3 year period. We reiterate our BUY rating on the stock. However we need to revise our target price for the stock based on FY15 estimates.

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