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Power Finance Corp.: Mixed earnings performance - Views on News from Equitymaster

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Power Finance Corp.: Mixed earnings performance

Jun 5, 2014

Power Finance Corp. (PFC) declared its results for the fourth quarter (4QFY14) and the financial year 2013-14. The institution has reported a 17.4% YoY and 9.1% YoY growth in net interest income and net profits respectively. For the full year, the profits have grown by healthy 22.6% YoY. Here is our analysis of the results.

Performance summary
  • Income from operations rises by 20.6% YoY during 4QFY14 and 24.7% YoY for full year FY14 on the back of a 18% YoY growth in advances.
  • Bottom-line expands by 9.1% YoY in 4QFY14 and healthy 22.6% YoY for the full year FY14. While higher income and lower provisions boosted the profits for the company, higher operating costs restricted the bottom-line growth.
  • Net interest margins improve significantly to 4.9% in FY14 from 4.4% in FY13.
  • Net NPA to advances decreases to 0.52% at the end of FY14, as against 0.63% in FY13.
  • Capital adequacy ratio (CAR) stands at healthy 20.1% as at the end of FY14.

Standalone Financial snapshot
Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Income from operations 46,690 56,324 20.6% 172,661 215,224 24.7%
Interest expended 29,018 35,576 22.6% 111,605 137,481 23.2%
Net Interest Income  17,672 20,748 17.4% 61,057 77,743 27.3%
Net interest margin       4.4% 4.9%  
Other Income 14 37 168.3% 64  150 134.6%
Operating expense 412 856 108.0% 1,394 2,261 62.2%
Provisions and contingencies 15 12 -15.9% 57 49 -13.5%
Profit before tax 17,260 19,917 15.4% 59,670 75,583 26.7%
Tax 4,318 5,802 34.4% 15,474 21,406 38.3%
Effective tax rate 25.0% 29.1%   25.9% 28.3%  
Profit after tax/ (loss) 12,941 14,115 9.1% 44,196 54,178 22.6%
Net profit margin (%) 27.7% 25.1%   25.6% 25.2%  
No. of shares (m)         1,320  
Book value per share (Rs)*         190.1  
P/BV (x)         1.6  
* (Book value as on 31st March, 2014)

What has driven performance in FY13?
  • PFC delivered mixed results for the quarter ended March 2014. While the income profile grew healthier and the provisions stood lower, these gains were offset by the exceptionally high operating costs that contained the profit growth at 9.1% YoY for 4QFY14. The profits for the year exceeded our estimates by 9% primarily due to higher reported interest income during the quarter.

  • Defying the power sector challenges and subdued economic growth, the company has reported healthy 18% YoY growth in advances. While the sanctions reported a de-growth, the disbursements were up by mere 4.5% YoY during FY14. Continued decline in sanctions stands worrisome for PFC. While the contribution from the generation segment to the sanction pipeline has gone up to 69% in FY14 as against 51% a year ago, the share of transmission segment has come down (11% in FY13 to 5% in FY14). The generation segment has also helped mop up disbursements during FY14. However, the traction in disbursements has been quite sluggish compared to past trends as the company's asset mix tends to be exposed to the most vulnerable sectors of the economy. That said, with the constant measures pertaining to resolution of power sector related issues and the expected surge in disbursements and repayments especially with the stable government in power, the company expects to maintain the accelerated growth trend in advances going ahead. And to boost the advances growth, the company has planned to raise resources to the tune of Rs 440 bn.

    Sanctions decline-stands worrisome
    (Rs m) FY13 FY14 Change
    Sanctions 751,470 607,290 -19.2%
    Disbursements 451,510 471,620 4.5%
    D / S 60% 78%  
    Advances 1,603,670 1,892,312 18.0%
    Sanctions Breakup
    Generation 51% 69%  
    Transmission 11% 5%  
    Distribution 2% 8%  
    Others 36% 17%  

  • The company's exposure to state power utilities continues to remain highest with 70% of disbursements and 76% of total sanctions. While its distinctly clear that PFC's exposure to the beleaguered state power utilities stand higher, the company endeavors to diversify and de-risk its loan portfolio by increasing lending to private sector utilities that observed increased disbursements during FY14.

  • The NII for the quarter has grown by 17.4% YoY and 27.3% YoY for FY14 by the virtue of steady loan growth and margins expansion. The margins have reported a strong traction, improving from 4.4% in FY13 to 4.9% in FY14. Higher yields coupled with lower cost helped the company to report healthy margins during the year. The reduction in surplus balance sheet liquidity also beefed up margins for the full year. The management is confident of NIMs improving in the light of softening of policy rates going forward.

  • The other income performance stood healthy with company reporting staggering 135% YoY growth in other income during FY14. The other income helped boost the profitability of the bank for the year.

  • However, the operating costs for the company have stood on the higher side. PFC has reported 108% YoY increase in operating expenses during 4QFY14 and 62.2% YoY in FY14. Higher operating expenses contained the profits for PFC.

  • PFC has reported stable asset quality over the years. On annual basis, the NPAs continue to move downwards. During FY14, the gross NPAs for the company came down to 0.65% in FY14 from 0.71% a year ago. Similarly, the net NPAs too were down to 0.52% in FY14 from 0.63% in FY13. This can be attributed to the company's endeavors to focus on recoveries and repayments considering the fact that the company's loans are guarded by government guarantees and escrow mechanism. Furthermore, as mentioned earlier the company is constantly taking efforts to de-risk its asset portfolio as a matter of fact that PFC lends primarily to inherently weak state power utilities. Hence, on the conservative side, we stick to our higher estimates for gross NPAs for next two years and expect the company to report increased NPAs by FY16.

  • Capital adequacy ratio (CAR) has been reported healthy at 20.1% as at the end of FY14, Tier I stood at 16.4%.
What to expect?
At the current price of Rs 309, the stock is trading at a multiple of 1.2 times our estimated FY16 adjusted book value.

Healthy growth in assets and improvement in margins have supported the strong earnings performance every quarter for Power Finance Corp (PFC). 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.

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. Moreover, with the new government in power, higher possibilities of resolution of power sector issues have gathered steam.

Nevertheless, we do not believe that issues in the power sector are going to disappear overnight. We do believe that projects in the power sector will takeoff from here and PFC will continue to remain one of the lead financers, however, the current valuations factor in most of the medium term upsides.

The stock has doubled (up 103%) since we recommended it in August 2012. Since it has breached the target price, we recently recommended investors to SELL it and book profits

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