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Power Fin Corp: Robust bottom-line performance

Aug 9, 2012

Power Finance Corp. (PFC) declared its results for the first quarter of the financial year 2012-13 (1QFY13). The institution has reported a 36% YoY and 42% YoY growth in income from operations and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income rises by 43% YoY during 1QFY13, on the back of 29% growth in advances.
  • Bottomline expands by 42% YoY in 1QFY13 on account of higher NII growth and a benign increase in other expenses.
  • Net interest margin improved significantly from 3.9% in 1QFY12 to 4.2% in 1QFY13.
  • Net NPA (non-performing assets) to advances increase to 0.91% at the end of 1QFY13, from 0.20% at the end of 1QFY12, however asset quality has not deteriorated further since FY12.
  • Capital adequacy ratio (CAR) is comfortable at 18.55% at the end of 1QFY13.

Rs (m) 1QFY12 1QFY13 Change
Income from operations 29,080 39,439 35.6%
Interest expended 19,812 26,200 32.2%
Net Interest Income 9,268 13,239 42.8%
Net interest margin 3.9% 4.2%  
Other Income 162 10 -94.1%
Operating expense 258 273 5.7%
Provisions and contingencies 12 13 9.5%
Profit before tax 9,160 12,963 41.5%
Tax 2,298 3,244 41.2%
Effective tax rate 25.1% 25.0%  
Profit after tax/ (loss) 6,862 9,719 41.6%
Net profit margin (%) 23.6% 24.6%  
No. of shares (m)   1,320  
Book value per share (Rs)*   154.2  
P/BV (x)   1.3  
* (Book value as on 30th June, 2012)

What has driven performance in 1QFY13?
  • The generation sector comprised the largest allocation of PFC's loan book in 1QFY13 (85%). Private sector projects enjoyed a higher allocation of 12%, compared to 8% in 1QFY12. 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, i.e. from 1/3rd to around 60%. The company reduced its loans to the state governments to 63% from 65% previously. Loans to the central sector decreased marginally.

  • PFC managed to grow its advances by 29% YoY in 1QFY13, and even saw a 3% increase in the three month period from April-June 2012. However, a slowdown was seen in the company's sanctions, which fell 15.5% YoY in 1QFY13. Disbursements however increased by 29%. However, the company already has a large order book (outstanding sanctions) of Rs 1.6 trillion as of June 2012. 41% of these sanctions already have their documents executed and disbursement have commenced.

    Segment-wise performance*
    (Rs m) 1QFY12 1QFY13 Change
    Sanctions 132,350 111,820 -15.5%
    Disbursements 60,990 78,840 29.3%
    D / S 46% 71%  
    Advances 1,040,500 1,344,280 29.2%
    Sanctions Breakup
    Generation 83% 75%  
    Transmission 9% 10%  
    Distribution 0% 8%  
    Others 8% 8%  

  • PFC was able to improve its margins to 4.2% from 3.9% in 1QFY12. 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 improved to 2.6%. Provided that the central bank keeps its rates steady, the institution will be able to improve its spreads. Last years, margins dipped due to the RBI's aggressive monetary policy. PFC sees its sustainable NIMs at around 4%.

  • PFC is in advanced talks with Tata Capital about setting up a US$ 1 bn private equity (PE) fund. The fund so formed will be a joint venture between Tata Capital and PFC in the ratio 51:49. Initially, in the first stage, US$ 300 m will be used to set up the fund and later on, the total investment will be US$ 1 bn. The funds will be used to buy stakes in power projects and maybe even coal mines.

  • State Electricity Boards (SEBs) have been in trouble for a while now. So much so that the sector has been dubbed as the next Kingfisher and most banks have already restructured these power assets . PFC has told the Ministry of Finance that it cannot restructure the short term loans of these discoms. However, it will be offering a Rs 173 bn "transition loan" to troubled discoms in Punjab, Uttar Pradesh, Andhra Pradesh, Rajasthan, Tamil Nadu and Haryana. This loan will be offered with a three year moratorium and seven year repayment. This will help meet their cash requirement. PFC has a total exposure of Rs 18.9 bn in short-term loans and Rs 58 bn of long-term loans to state utilities. So far there have been no non-performing assets or debt write-off of any state power utilities.

  • PFC's gross NPAs increased to 1.02% of its total loans at the end of 1QFY13, compared to 0.23% at the end of 1QFY12. Net NPAs were 0.91% at the end of the fiscal, compared to 0.2% earlier. However, asset quality has been maintained at the level seen at the end of FY12 and there have been no further slippages.

What to expect?
At the current price of Rs 193, the stock is trading at a multiple of 1 times its FY15 adjusted book value. There have been numerous issues including policy inaction, environmental clearances, and concerns on the financial health of state electricity boards. The Power Ministry is however trying to remedy the situation with the troubled discoms and a decision on the same is expected by September 2012. Their balance sheets need to be cleansed and tariffs need to be raised to make them more viable. The "transition loan" that PFC is providing these companies will somewhat help tide the cash crunch, but a more sustained policy effort is still required to improve their situation.

Coal India's fuel supply commitment will also help somewhat in alleviating the troubles of power companies. Plus PFC plans to start funding the overseas acquisitions of productive resources of companies such as coal mines and oil wells. We have been conservative in our estimates for the company. On the plus side, the company however has a large outstanding sanction book of Rs 1.6 trillion, which are pending disbursement. Thus, even with a slowdown in new sanctions, PFC was still able to see a 29% growth in its loan book in 1QFY13. It has seen a 20%+ growth over the past three years. On the asset quality front, PFC hasn't seen a further deterioration in the same since FY12.

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. It has not restructured any SEB debt as such. Reserve Bank of India (RBI) monetary easing/or holding rates steady going forward 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 as mentioned in the quarterly performance review. However we have been adequately conservative in our provisioning estimates and have revised our target price for the stock based on FY15 estimates to Rs 235.

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