Power Finance Corp: Profit growth remains subdued

Power Finance Corp. (PFC) declared its results for the first quarter (1QFY16). The institution has reported a robust 24.6% YoY and 8.8% YoY growth in net interest income and net profits respectively.

Performance summary

• Income from operations grew by 15.4% YoY during 1QFY16 on the back of healthy 13% YoY growth in advances.
• Net interest margins improved slightly to 5.1% in 1QFY16.
• However, at the net level the profits have grown by a relatively subdued 8.8% YoY due to a steep jump in operating expenses and provisions and contingencies.
• Net NPA to advances increased to 1.02% at the end of 1QFY16, compared to 0.87% in 1QFY15.
• Capital adequacy ratio (CAR) stands at healthy 20.71% as at the end of 1QFY16.

Standalone Financial Performance Snapshot

Rs (m)	1QFY15	1QFY16	Change
Income from operations	58,563	67,553	15.4%
Interest expended	36,749	40,366	9.8%
Net Interest Income	21,814	27,187	24.6%
Net interest margin	4.8%	5.11%
Other Income	55	38	-31.6%
Operating expense	528	1,796	240.2%
Provisions and contingencies	1,301	2,496	91.9%
Profit before tax	20,040	22,933	14.4%
Tax	5,558	7,171	29.0%
Effective tax rate	27.7%	31.3%
Profit after tax/ (loss)	14,483	15,762	8.8%
Net profit margin (%)	24.7%	23.3%
No. of shares (m)		1,320
Book value per share (Rs)*		231.5
P/BV (x)		1.0

* (Book value as on 30th June, 2015)

What has driven performance in 1QFY16?

• PFC recorded a robust 13% YoY jump in advances during the quarter. This coupled with improved interest spreads have translated into a strong growth of 24.6% in Net Interest Income during the quarter. The interest spread increased to 3.64% in 1QFY16 as compared to 3.3% in 1QFY15. Even NIMs improved by 0.31% in 1QFY16 to 5.11%.
  
  Sanctions pipeline strengthens

  (Rs m)	1QFY15	1QFY16	Change
  Sanctions	100,760	196,380	94.9%
  Disbursements	82,820	77,500	-6.4%
  D / S	82%	39%
  Advances	1,951,910	2,213,330	13.4%
  Sanctions Breakup
  Generation	73%	76%
  Transmission	6%	7%
  Distribution	3%	4%
  Others	17%	14%

  
  
• During the quarter, the overall share of bonds in total borrowings has risen to 88% as compared to 76% in year-ago quarter. Term loans contributed 8% in 1QFY16 as compared to 18% share in 1QFY15. PFC's cost of funds has fallen by 0.23% to 8.72% in 1QFY16.

• The operating expenses rose by a steep 240% YoY during the quarter. The NBFC has made CSR provision of Rs 1457.9 m for the entire year FY16 during the 1QFY16 as compared to the provision being created on a proportionate basis in each quarter. PFC had made a CSR provision of Rs 214.4 m in 1QFY15.

• Even the provisioning has risen by a sharp 91.9% YoY during the quarter. This is partly on account of the applicability of RBI norms on Restructuring/Rescheduling/Renegotiating (R/R/R) loans. As per these norms, the new project loans to generating companies restructured wef 1/4/2015 have to be provided for @ 5% whereas the outstanding loans to generating companies as on 31/3/2015 will attract provisioning of 2.75% from FY15 to reach 5% by FY18. Accordingly PFC has made the additional provision of Rs 2013.4 m @0.75% on outstanding R/R/R loans of Rs 218.8 bn pertaining to only private sector in the 1QFY16 resulting in the huge jump in provisioning for the quarter.

• Due to a sharp increase in operating expenses and provisions coupled with higher tax incidence, PFC saw its net profit grow by a relatively slower 8.8% for the quarter. Even the other income earned has fallen by 31.6% YoY for the quarter.

• Increased slippages saw the Gross NPAs as a proportion of total advances increase to 1.25% in 1QFY16 as compared to 1.09% in 1QFY15.

What to expect?

At the current price of Rs 201, the stock is trading at a multiple of 1 time its current book value and 0.8 times its FY18 estimated book value.
The investment climate in the power sector continues to remain weak as loan disbursements have fallen by 6.4% YoY during the quarter. Even the asset quality has deteriorated on increased slippages. This along with increased provisioning due to the RBI norms is expected to keep PFC's margins depressed going ahead. But given that PFC will be the biggest beneficiary of the revival in the power sector and given the fact that the entity offers very attractive dividend yield of over 4%, we recommend investors to buy the stock.