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Power Finance Corp: NPAs rise - Views on News from Equitymaster
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Power Finance Corp: NPAs rise
Jun 24, 2015

Power Finance Corporation (PFC) declared its results for the fourth quarter of FY15 recently. The company has reported a 14.6% YoY and 10.6% YoY growth in income from operations and net profits respectively. Here is our analysis of the results.

Performance summary
  • Income from operations rises by 14.6% YoY during 4QFY15.
  • Bottom-line expands by 10.6% YoY in 4QFY15 due to a rise in other income and fall in operating expenses.
  • Net interest margins declined marginally to 4.9% in 4QFY15.
  • Net NPAs to advances increases to 0.87% at the end of FY15, compared to 0.52% in FY14.
  • Capital adequacy ratio (CAR) stands at healthy 20.34% as at the end of 4QFY15.
  • The board of directors has declared total dividend of Rs 9.1 per share (dividend yield 3.3%)

Standalone Financial Performance Snapshot
Rs (m) 4QFY14 4QFY15 Change FY14 FY15 Change
Income from operations 55,749 63,896 14.6% 213,226 248,613 16.6%
Interest expended 35,001 41,975 19.9% 135,483 163,114 20.4%
Net Interest Income  20,748 21,920 5.7% 77,743 85,499 10.0%
Net interest margin 5.0% 4.9%   4.9% 4.9%  
Other Income 37 319 755.8% 150 455 202.4%
Operating expense 856 225 -73.7% 2,261 2,111 -6.6%
Depreciation & Amortization  12 16 29.0% 49 61 23.5%
Profit before tax 19,917 21,998 10.5% 75,583 83,782 10.8%
Tax 5,802 6,391 10.1% 21,406 24,189 13.0%
Effective tax rate 29.1% 29.1%   28.3% 28.9%  
Profit after tax/ (loss) 14,114 15,608 10.6% 54,178 59,593 10.0%
Net profit margin (%) 25.3% 24.4%   25.4% 24.0%  
No. of shares (m)         1,320  
Book value per share (Rs)*         244.1  
P/BV (x)         1.1  
* (Standalone Book value as on 31st March, 2015)

What has driven performance in 4QFY15?
  • PFC reported strong performance during the quarter gone by. However, asset quality deteriorated (reflected by a rise in NPAs) during the quarter. Nonetheless, NIMs have remained more or less flat. PFC was able to manage an interest spread (yield on assets less cost of funds) of 3.4% odd at the end of the quarter.

  • Loan assets increased 15% YoY during the year. The generation segment contributed about 73% to the overall loan portfolio with the state sector having the highest share.

  • Outstanding sanctions pipeline stands at Rs 1.4 trillion. Total disbursement at the end of the quarter and the year stood at Rs 178.5 bn and 446.9 bn respectively.

  • The borrowing profile of the company is .characterized by money raised through bonds that contribute almost 85% to the PFC's borrowings. Term loans contribute 12% of the borrowings and the rest of the portfolio is funded through short term loans.

  • Gross NPAs spiked up to 1.09% in 4QFY15 from 0.65% a year ago. The provisions for the quarter & the year also have moved up and continue to remain on the higher side indicating that asset quality has worsened a bit.
What to expect?
At the current price of Rs 275, the stock is trading at a multiple of 1.1 times its current book value and 0.86 times its FY17 book value.

PFC reported a 15% YoY growth in loan assets during the year. However, a 5.2% YoY fall in disbursements during the year indicate that investments in the power sector haven't gathered the momentum as envisaged. NIMs were also more or less stable while profitability growth was supported by higher other income.

While PFC is expected to be the biggest beneficiary once investments in the power sector pick up execution and recovery risks in the power space continue to pose a threat. Further, increasing competition in the private sector infrastructure financing is also a cause of worry. Deterioration in asset quality is another concern that has surfaced this year. Given the fact that the entity offers very attractive dividend yield and that there is comfort in valuations, we recommend investors to hold on to the stock.

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