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Power Finance Corp: NPAs keep inching up

Nov 6, 2014

Power Finance Corp. (PFC) declared its results for the second quarter (1QFY15) and first half (1HFY15) of the financial year 2014-15. The institution has reported a decent 11.7% YoY and 10.6% YoY growth in net interest income and net profits respectively. For 1HFY15, the profits were up by 15.6% YoY. Here is our analysis of the results.

Performance summary
  • Income from operations rises by 18.2% YoY during 2QFY15 on the back of healthy 18.4% YoY growth in advances.
  • Bottom-line expands by 10.6% YoY in 2QFY15 due to higher other income and lower operating expenses.
  • Net interest margins have remained flat at 4.9% in 2QFY15.
  • Net NPA to advances increases to 0.8% at the end of 2QFY15, compared to 0.5% in 2QFY14.
  • Capital adequacy ratio (CAR) stands at healthy 21.1% as at the end of 2QFY15.

Standalone Financial Performance Snapshot
Rs (m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Income from operations 53,335 63,047 18.2% 103,495 122,231 18.1%
Interest expended 34,752 42,282 21.7% 67,383 80,939 20.1%
Net Interest Income 18,584 20,765 11.7% 36,113 41,292 14.3%
Net interest margin       4.9% 4.9%  
Other Income 34 44 27.2% 45 99 118.1%
Operating expense 709 578 -18.4% 1,015 1,105 8.9%
Provisions and contingencies 12 16 30.0% 25 30 22.7%
Profit before tax 17,897 20,214 12.9% 35,118 40,255 14.6%
Tax 5,159 6,129 18.8% 10,397 11,686 12.4%
Effective tax rate 28.8% 30.3%   29.6% 29.0%  
Profit after tax/ (loss) 12,738 14,086 10.6% 24,720 28,568 15.6%
Net profit margin (%) 23.9% 22.3%   23.9% 23.4%  
No. of shares (m)         1,320  
Book value per share (Rs)*         210.3  
P/BV (x)         1.3  
* (Book value as on 30th September, 2014)

What has driven performance in 2QFY15?
  • PFC reported modest improvement in performance during the quarter gone by. Both the interest income and profitability stood higher for the first half of FY15. While income performance stood healthy provisions stood on the higher side restricting a healthy profitability for the company. Asset quality has deteriorated for the second consecutive quarter during FY15.

  • While the loan growth at 18.4% YoY looks strong, it has moderated vis--vis the growth in the preceding years. While the generation segment has contributed highest to the total sanctions and the disbursements, state and private sectors too have 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 4.9% levels. Expansion in spreads supported by healthy interest income performance has maintained stable NIMs. Going forward too, the company is expected to maintain margins.

  • The borrowing profile of the company is .characterized by money raised through bonds that contribute almost 81% to the PFCs borrowings. Term loans contribute 17% 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, thus supporting margins for the company.

  • The company also reported strong other income growth of 118% during 1HFY15 providing a boost to the profitability.

  • The bad loans piled up with gross NPAs spiking up to 0.99% in 2QFY15 from 0.67% a year ago. The provisions for the quarter also have moved up and continue to remain on the higher side. This tells us that the company might be further vulnerable to asset quality risks; also going by the fact that the macro environment is yet to catch up.
What to expect?
At the current price of Rs 280, the stock is trading at a multiple of 1.1 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 expensive to buy at current levels. Hence, we reiterate SELL view on the stock.

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