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Power Fin Corp: Policy changes in the making

Aug 3, 2011

Power Finance Corp. (PFC) declared its results for the first quarter of the financial year 2011-12 (1QFY12). The institution has reported a 21% YoY and 5% YoY growth in income from operations and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income rises by 10% YoY during 1QFY12, on the back of 22% growth in advances.
  • Bottomline expands by 5% YoY in 1QFY12 on account of higher interest costs and other expenses.
  • Net interest margin fell slightly from 4.1% in 1QFY11 to 3.9% in 1QFY12.
  • Net NPA (non-performing assets) to advances remain increase to 0.20% at the end of 1QFY12, from 0.01% at the end of 1QFY11.
  • Capital adequacy ratio (CAR) is comfortable at 18.9% at the end of 1QFY12.

Rs (m) 1QFY11 1QFY12 Change
Income from operations 24,046 29,080 20.9%
Interest expended 14,896 19,046 27.9%
Net Interest Income 9,150 10,033 9.7%
Net interest margin 4.1% 3.9%  
Other Income 129 162 25.2%
Operating expense 6 258 4090.0%
Provisions and contingencies 9 12 37.8%
Exchange rate (gain) /loss 672 765 13.9%
Profit before tax 8,593 9,160 6.6%
Tax 2,069 2,298 11.1%
Effective tax rate 24.1% 25.1%  
Profit after tax/ (loss) 6,524 6,862 5.2%
Net profit margin (%) 27.1% 23.6%  
No. of shares (m)   1,320  
Book value per share (Rs)*         138.3  
P/BV (x)   1.3  
* (Book value as on 30th June, 2011)
*Operating expenditure for 1QFY11 adjusted for reallocation to APDRP scheme.

What has driven performance in 1QFY12?
  • The generation sector comprised the largest allocation of PFC's loan book in 1QFY12 (85%). Private sector and PPP (public private partnership / joint) projects enjoyed a similar allocation compared to 1QFY11. Its contribution to the State and Central governments increased marginally.

  • PFC managed to grow its advances by 22% YoY in 1QFY12, and even saw a 4% increase in the three months period from April-June 2011. However, a slowdown was seen in the company's disbursement, which fell 24% YoY in 1QFY12. Sanctions however increased by 17%.
  • Disbursements see a slowdown
    (Rs m) 1QFY11 1QFY12 Change
    Sanctions 144,280 169,410 17.4%
    Disbursements 81,280 62,200 -23.5%
    D / S 56% 37%  
    Advances 855,970 1,040,500 21.6%
    Sanctions Breakup
    Generation 40% 65%  
    Transmission 22% 7%  
    Distribution 1% 0%  
    R-APDRP 15% 22%  
    Others 22% 6%  
    Note: R-APDRP (Re-structured Accelerated Power Development and Reform Programme)

  • A few policy changes are on its way in the power sector, in order to reduce the losses of various State Electricity Boards (SEBs). These boards had a whopping combined loss of Rs 1.4 trillion in FY11. A few of the proposed initiatives which will help benefit PFC are the annual revision of power tariffs, accounting for an increase in power purchase costs, and the clearing of outstanding subsidies to power utilities. The broadening of the criteria for inclusion of towns under R-APDRP assistance is also expected to benefit PFC, the nodal agency for the programme.

  • State governments are also expected to ensure payments of outstanding dues to distribution utilities, and try and reduce their Aggregate Technical and Commercial losses (AT&C) to 15%. Governments are also considering converting their loans to the distribution utilities to government equity in order to ensure capital infusion and improvement in net worth of the various utilities. A reduction in the debt/equity ratio for these utilities will help improve their financial health greatly. All these moves will help benefit a lender like PFC.

  • The company successfully completed its follow on public offering (FPO) raising Rs 34.3 bn from its fresh issue of shares. The government also pared its stake in the company from 89.8% to 73.7% by selling 57.4 m shares in the company. This equity issuance helped improve its capital adequacy ratio to 18.9% at the end of 1QFY12. The increased net worth would also help PFC cater to the financial needs of large power projects.

  • PFC's gross NPAs also remained negligible at 0.23% while net NPAs are 0.2% of advances in 1QFY12, from 0.01% seen at the end of 1QFY11. The increase in NPAs was on account of a private sector wind power project which was classified as an NPA in 4QFY11. This asset will remain NPA for the year according to guidelines, however it will start paying interest in 1-2 months time. However the financier, does not see any stress on the NPA front going forward since its lending it supported by an escrow mechanism and government guarantees.

What to expect?

At the current price of Rs 179, the stock is trading at an attractive multiple of 0.9 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, we expect there to be some improvement in the sector, but this may take some time to get implemented. Irrespective, we have been extremely conservative in our estimates for FY12, and we expect a very flattish growth in the loan book on account of a slowdown in disbursements. On the plus side, the company however has a large outstanding sanction book of Rs 1.7 trillion, which are pending disbursement. Its Orissa ultra mega power project (UMPP), which was supposed to take off last year, has finally been given a green signal, and 20 companies including all the major power sector players have expressed interest in the project.

PFC does not expect significant deterioration in asset quality going forward on account of government guarantees, and the escrow mechanism. The company is adequately capitalized post its FPO. PFC is also planning to access other funding sources though medium term notes and infrastructure bonds in the current financial year. However, on account of frequent equity dilution necessary to maintain a 15% capital adequacy ratio, and a growth slowdown in the sector leading to lower profitability, we expect the company's return on equity (ROE) to be depressed for the next few years. We have revised our FY13 target price for the stock taking these concerns into account to Rs 344. However, from at the current valuation the stock continues to offer attractive returns over a 2 to 3 year period.

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