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Power Finance Corp.: Asset quality in control - Views on News from Equitymaster

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Power Finance Corp.: Asset quality in control
Aug 6, 2013

Power Finance Corp. (PFC) declared its results for the first quarter of the financial year 2013-14 (1QFY14). The institution has reported a healthy 32% YoY and 23% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Income from operations rises by 27% YoY during 1QFY14 on the back of strong 24% YoY growth in advances.
  • Bottom-line expands by 23% YoY in 1QFY14 due to higher NII (net interest income), stupendous growth in other income, and lower provisions.
  • Net interest margins improve significantly to 4.8% in 1QFY14 from 4.2% in 1QFY13.
  • Net NPA to advances decreases to 0.59% at the end of 1QFY14, compared to 0.91% in 1QFY13.
  • Capital adequacy ratio (CAR) stands at healthy 18.8% as at the end of 1QFY14.

Standalone financial performance snapshot
Rs (m) 1QFY13 1QFY14 Change
Income from operations 39,439 50,148 27.2%
Interest expended 26,200 32,631 24.5%
Net Interest Income 13,239 17,517 32.3%
Net interest margin 4.2% 4.8%  
Other Income 10 23 142.1%
Operating expense 273 307 12.5%
Provisions and contingencies 13 13 -2.3%
Profit before tax 12,963 17,221 32.8%
Tax 3,244 5,238 61.5%
Effective tax rate 25.0% 30.4%  
Profit after tax/ (loss) 9,719 11,982 23.3%
Net profit margin (%) 24.6% 23.9%  
No. of shares (m)   1,320  
Book value per share (Rs)*   177.5  
P/BV (x)   0.5  
* (Book value as on 30th June, 2013)

What has driven performance in 1QFY14?
  • PFC puts up another strong quarterly performance characterized by growth with quality. While loan assets and sanctions grew at healthy pace, the profitability reported 23.3% YoY growth. Sturdy net interest income growth and whopping other income drove the profits for the company during 1QFY14.

  • Taking advantage of the gradual allaying of power sector concerns, PFC reported healthy 37.5% YoY growth in sanctions and 24.1% YoY growth in loan assets during the first quarter. Although, disbursements growth was not in-line with the increased sanctions, the strong sanctions pipeline to the tune of Rs 1700 bn speaks of the growth sustenance going ahead. While the generation segment contributed almost 65% to the sanctions, the transmission and distribution segment contributed 16% each to the overall sanctions during the quarter. In terms of disbursements, next to generation segment, transitional finance contributed largely to the overall disbursements of the company. Moreover, the increased contribution of private sector towards disbursements will enable PFC to diversify risks. The transitional finance support from PFC stands at Rs 180 bn of which the major part has already been sanctioned. The constant measures pertaining to resolution of power sector related issues, the outstanding sanctions pipeline and the ability of developers to implement projects will decide the growth trends going ahead. Moreover, the Management stands positive in this regard.

    Sanctions pipeline strengthens
    (Rs m) 1QFY13 1QFY14 Change
    Sanctions 111,820 153,750 37.5%
    Disbursements 78,840 82,350 4.5%
    D / S 71% 54%  
    Advances 1,347,420 1,671,960 24.1%
    Sanctions Breakup
    Generation 75% 65%  
    Transmission 10% 16%  
    Distribution 8% 16%  
    Others 8% 3%  

  • PFC has surprised positively on margins front during 1QFY14 as the margins during the quarter stood at their peak. The company recorded healthy margins at 4.8% during 1Q that stands highest in the industry. This was primarily due to expansion in spreads by 66 bps supported by healthy interest income performance. The healthy margins have largely come from the incremental disbursements that happened during the quarter. Moreover, the fact that NIMs have peaked out during the first quarter, a marginal reduction stand imminent going forward.

  • The company also reported strong other income during the quarter providing a boost to the profitability.

  • Notably, PFC's asset quality has proved to be impeccable over the years vis-a-vis the industry levels and it continues to be so despite all odds. 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. Therefore, both Gross and Net NPAs have witnessed consistent fall since more than year now. While the Gross NPAs dropped from higher levels of 1.02% in 1QFY13 to 0.69% in 1QFY14, the Net NPA also fell sharply from 0.91% a year ago to 0.59% in 1Q this fiscal. It is worth noting that the company has not observed any fresh additions to NPAs for four quarters in a row now. The total outstanding restructured book stands at Rs 100 bn as at the end of June quarter. Delay in commissioning of projects such as ONGC-Tripura and others including Suzlon have added to the restructured book. Nonetheless, with gas issues being addressed, FRP approvals in place and the acceleration in implementation of APDRP schemes, the company stands hopeful of maintaining asset quality going forward.

  • The borrowing profile of the company is characterized by money raised through bonds that contribute almost 80% to the PFC's borrowings. Also, the foreign currency loans that account for 6% of the total borrowings is not much of a concern as 24% of such loans are JPY denominated and only 10% are dollar denominated. This has ensured minimal losses on account of sharp currency fluctuations.

What to expect?

At the current price of Rs 106, the stock is trading at a multiple of 0.5 times our estimated FY15 adjusted book value. Despite the management's confidence with regards to abating power sector concerns, the power space continues to grapple with chronic issues. Fuel linkages, environmental clearances, financial closure, policy inaction and so on and the weak performance of the state boards continue to haunt the power financiers. 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.

Nevertheless, the institution has far superior asset quality versus most banks in the public or private space. Over the past 25 years it did not account for any bad debts written off in the state sector. Moreover, the management is hopeful of maintaining the asset quality on account of government guarantees, and the escrow mechanism. Moreover, PFC has not restructured any SEB (State Electricity Board) debt as such and boasts of strong recovery mechanism.

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. Sufficient capital, robust sanctions pipeline, IFC status and with GOI as the major shareholder and supporter makes us positive on the company. However, the power sector concerns and the company's exposure to the risky assets prompts us to reiterate our Hold rating on the stock.

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