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Power Finance Corp: Profit growth remains subdued - Views on News from Equitymaster
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Power Finance Corp: Profit growth remains subdued
Aug 25, 2015

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.

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