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PFC: Enhancing shareholder returns

Oct 28, 2009

Performance summary
  • Net interest income rises by 38% YoY during 1HFY10 on the back of 19% YoY growth in advances.
  • Bottomline expands by 91% YoY in 1HFY10 aided by exchange rate gains and higher other income.
  • Net interest margin improved from 3.8% in 1HFY09 to 4.2% in 1HFY10.
  • Gross NPA to advances remain negligible at 0.02% at the end of 1HFY10.
  • Capital adequacy ratio (CAR) comfortable at 17.7% at the end of 1HFY10.
  • ROE improves from 16% in 1HFY09 to 20% in 1HFY10.

Consolidated numbers…
Rs (m) 2QFY08 2QFY09 Change 1HFY09 1HFY10 Change
Income from operations 15,850 20,030 26.4% 30,245 38,945 28.8%
Interest expended 10,358 12,407 19.8% 19,614 24,283 23.8%
Net Interest Income 5,492 7,623 38.8% 10,631 14,662 37.9%
Net interest margin       3.8% 4.2%  
Other Income 171 435 153.6% 192 449 133.4%
Operating expense 221 231 4.5% 385 401 4.2%
Provisions and contingencies 10 10 0.0% 20 19 -5.0%
Exchange rate (gain) /loss 861 177   1,437 (454) -131.6%
Profit before tax 4,571 7,640 67.1% 8,981 15,145 68.6%
Tax 1,278 1,261 -1.3% 2,725 3,216 18.0%
Effective tax rate 28.0% 16.5%   30.3% 21.2%  
Profit after tax/ (loss) 3,293 6,379 93.7% 6,256 11,929 90.7%
Net profit margin (%) 20.8% 31.8%   20.7% 30.6%  
No. of shares (m)     1,148 1,148  
Book value per share (Rs)*         103.0  
P/BV (x)         2.2  
* (Book value as on 30th September 2009)

What has driven performance in 2QFY10?
  • PFC being the nodal agency designated by the Government of India for financing power projects in the country grew its loan sanctions to central, state, PPP and private sector by 20% YoY in 1HFY09. This makes the growth in loans to power sector companies higher than the growth in funds lent to other sectors by banks. The government’s commitment to financing infrastructure projects that was reiterated in the recent Union Budget has paved the way for accelerated growth of the largest power financing institution in the country, PFC. However, the disbursements were lower by 10% YoY. The difference in sanctions and disbursements is because PFC is a project driven organization. The overall growth in loan book was a healthy 19% YoY, well in line with our estimates. Also due to better pricing power, the net interest margins improved from 3.8% in 1HFY09 to 4.2% in 1HFY10.

    Cautious growth…
    (Rs m) 1HFY09 1HFY10 Change
    Sanctions 289,840 348,280 20.2%
    Disbursements 98,230 88,620 -9.8%
    D / S 34% 25%  
    Advances 578,770 686,610 18.6%
    Generation 78% 75%  
    Transmission 12% 14%  
    Distribution 4% 1%  
    APDRP 0% 6%  
    Others 6% 4%  

  • While generation sector comprised the largest allocation of PFC’s loan book in 1HFY10, the institution is increasingly lending more to PPP (public private partnership / joint) projects.

  • PFC’s other income grew by 133% YoY primarily because the company has derived a lumpsum fees on its consulting business for UMPPs. This kind of growth is not sustainable and will remain lumpy in future as well.

  • PFC’s gross NPAs also remained negligible at 0.02% while net NPAs are 0.01% of advances in 1HFY10.

What to expect?
At the current price of Rs 223, the stock is trading at a multiple of 2.0 times our estimated FY11 adjusted book value. Given the investment opportunities in infrastructure segment, particularly power, the growth potential for a nodal government agency like PFC is immense given its proximity to the respective Ministries and participation in the policy decisions. The hardening of interest rates, however, increases the likelihood of bad debts. PFC’s ability to access long term funding, sustain reasonable margins and good asset quality sets it apart from financial institutions in the private sector. Having said that, we believe that at the current price the stock factors in most of the near term upsides. Investors are therefore advised to practice caution.

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