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Power Finance Corp: Asset quality deteriorates
Sep 2, 2014

Power Finance Corp. (PFC) declared its results for the first quarter of the financial year 2014-15 (1QFY15). The institution has reported a healthy 17.1% YoY and 20.9% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Income from operations rises by 18% YoY during 1QFY15 on the back of strong 17% YoY growth in advances.
  • Bottom-line expands by 21% YoY in 1QFY15 due to higher NII (net interest income) and stupendous growth in other income.
  • Net interest margins have remained stable at 4.8% in 1QFY15.
  • Net NPA to advances increases to 0.8% at the end of 1QFY15, compared to 0.6% in 1QFY14.
  • Capital adequacy ratio (CAR) stands at healthy 20.6% as at the end of 1QFY15.

Standalone Financials Snapshot
Rs (m) 1QFY14 1QFY15 Change
Income from operations 50,160 59,184 18.0%
Interest expended 32,631 38,657 18.5%
Net Interest Income 17,529 20,527 17.1%
Net interest margin 4.8% 4.8%  
Other Income 11 55 396.4%
Operating expense 307 527 71.9%
Provisions and contingencies 13 15 15.7%
Profit before tax 17,221 20,040 16.4%
Tax 5,238 5,558 6.1%
Effective tax rate 30.4% 27.7%  
Profit after tax/ (loss) 11,982 14,483 20.9%
Net profit margin (%) 23.9% 24.5%  
No. of shares (m)   1,320  
Book value per share (Rs)*   200.5  
P/BV (x)   1.3  

What has driven performance in 1QFY15?
  • While the interest income performance stood stronger for PFC for the first quarter of FY15, higher provisions restricted further the profits of the company. Asset quality has deteriorated for the second consecutive quarter. Nonetheless, the institution has put up an healthy show with robust earnings.

  • While the loan growth at 17% YoY looks strong, it has moderated vis-a-vis the growth in the preceding years. The generation segment that grew merely 13% YoY, while its share to the total sanctions and the disbursements remains highest. Loan growth from the private sector has remained robust, while the state electricity boards have also contributed towards superior loan growth.

  • Taking advantage of the gradual allaying of power sector concerns, outstanding sanctions pipeline and the stable business growth has ensured steady income performance for PFC. Margins therefore has remained flat at 4.8% levels. Expansion in spreads supported by healthy interest income performance has maintained stable NIMs. The stability of margins stands ensured going forward.

  • The borrowing profile of the company is .characterized by money raised through bonds that contribute almost 76% to the PFC's borrowings. Term loans contribute 18% of the borrowings. Also, the foreign currency loans that account for 5% of the total borrowings is not much of a concern ensuring minimal losses on account of sharp currency fluctuations. Hence, the cost of funds has been contained at desirable levels, thus supporting margins for the company.

  • 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 at Rs 55 m providing a boost to the profitability.

  • The bad loans have piled up with gross NPAs spiking up to 1.01% in 1QFY15 from 0.7% a year ago. This was primarily because two big accounts to the tune of Rs 7.5 bn have slipped into NPAs. The provisions for the quarter also have moved up and the provision coverage ratio has stood at 18.1% during the first quarter.
What to expect?
At the current price of Rs 270, the stock is trading at a multiple of 1.0 times its FY16 adjusted book value.

Healthy growth in assets and improvement in margins have supported the strong earnings performance every quarter for Power Finance Corp (PFC). Consistent business growth, stable earnings and robust return ratios, controlled asset quality and capital sufficiency makes up to a resilient balance sheet for PFC. Moreover, 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.

However, we do not believe that issues in the power sector are going to disappear overnight. We do believe that projects in the power sector will takeoff from here and PFC will continue to remain one of the lead financers, however, the current valuations factor in most of the medium term upsides.

Moreover, the stock has gathered sufficient momentum in the recent periods making it fairly priced at current levels. Hence, we reiterate our SELL recommendation on the stock.

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