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Power Finance Corp.: Hazy growth visibility - Views on News from Equitymaster
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Power Finance Corp.: Hazy growth visibility
Nov 11, 2013

Power Finance Corp. (PFC) declared its results for the second quarter (2QFY14) and first half (1HFY14) of the financial year 2013-14. The institution has reported a healthy 26.7% YoY and 22.9% YoY growth in net interest income and net profits respectively. For the first half, the profits have gone up by 23.1% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income rises by 26.7% YoY during 2QFY14 on the back of a strong 22% YoY growth in loan assets combined with an expansion in spreads.
  • Bottom-line expands by 22.9% YoY in 2QFY14 due to higher core interest income, strong growth in other income and lower provisions.
  • Net interest margins improve significantly to 5.0 % in 2QFY14 from 4.3% in 2QFY13.
  • Net NPA to advances decreases to 0.54% at the end of 2QFY14, compared to 0.86% in 2QFY13.
  • Capital adequacy ratio (CAR) stands at healthy 18.7% as at the end of 2QFY14.

Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Income from operations 41,875 53,323 27.3% 81,314 103,471 27.2%
Interest expended 27,218 34,752 27.7% 53,418 67,383 26.1%
Net Interest Income  14,656 18,571 26.7% 27,895 36,088 29.4%
Net interest margin 4.3% 5.0%   4.2% 4.9%  
Other Income 37 47 26.6% 46 70 50.2%
Operating expense 336 709 110.8% 609 1,015 66.8%
Provisions and contingencies 14 12 -15.5% 27 25 -9.2%
Profit before tax 14,343 17,897 24.8% 27,306 35,118 28.6%
Tax 3,978 5,159 29.7% 7,222 10,397 44.0%
Effective tax rate 27.7% 28.8%   26.4% 29.6%  
Profit after tax/ (loss) 10,365 12,738 22.9% 20,084 24,720 23.1%
Net profit margin (%) 24.8% 23.9%   24.7% 23.9%  
No. of shares (m)         1,320  
Book value per share (Rs)*         186.3  
P/BV (x)         0.5  
* (Book value as on 30th September, 2013)

What has driven performance in 2QFY14?
  • The September quarter proved to another successful quarter in a row for PFC in FY14. The company’s bottom-line has expanded by 22.9% on the back of strong core income and other performance. The NII grew by 26.7% YoY owing to strong 22% YoY growth in loan assets and expansion in spreads. Other income too expanded by healthy 36.6% YoY.

  • The macro-headwinds took a toll on the business performance of PFC during 2QFY14. While the growth in sanctions declined dramatically by 60.6% YoY, the disbursements were seen tepid. They grew by mere 1.1% YoY. Lower sanctions came on the back of poor growth coming from the transmission segment. The transitional finance made good business supporting the sanctions growth during the quarter. That said, the outstanding sanctions pipeline stands robust at Rs 1628.6 bn The growth in loan assets improved by 22.2% YoY during the second quarter of FY14.

    Sanctions growth weakens
    (Rs m) 2QFY13 2QFY14 Change
    Sanctions 305,500 120,500 -60.6%
    Disbursements 96,720 97,770 1.1%
    D / S 32% 81%  
    Advances 1,408,190 1,720,510 22.2%
    Sanctions Breakup
    Generation 22% 80%  
    Transmission 10% 2%  
    Distribution 0% 5%  
    Others 68% 14%  

  • Continuing the previous quarter trend, the margins for 2QFY14 moved up to higher levels of 5.0% from 4.3% in the corresponding period a year ago. This was largely supported by 49 bps expansion in yields and 36 bps reductions in costs on YoY basis. While the disbursements have not picked up that well during the second quarter of current fiscal, the sanctions pipeline still holds up. Therefore, margins sustenance should not be a problem for the company going forward.

  • Other income performance continues to improve every quarter. For the quarter gone by PFC reported healthy 26.6% YoY growth in other income and whopping 50% YoY growth for the first half. The company continues to maintain impeccable asset quality; despite all odds. The loan book continues to stand resilient with reduction in gross NPAs every passing quarter. The gross NPAs for 2QFY14 were seen down to 0.67% levels from 0.97% a year ago and net NPAs were down to 0.54% from 0.86% a year ago. The improving asset quality performance speaks off the company’s strong underwriting standards and healthy recoveries.

  • The borrowing profile for the company continues to remain pretty robust. Guarded from sharp foreign currency fluctuations and fluctuations in interest rates, the company’s 80% borrowings come from bonds.
What to expect?
At the current price of Rs 155, the stock is trading at a multiple of 0.6 times our FY16 adjusted book value.

PFC has been the perfect exemplar of sailing smooth through the hard times. Despite the power sector wreckage, the company has build-up a strong and resilient portfolio and continues to yield powerful returns and stands sustainable. Whether its asset quality or margins, PFC has demonstrated consistent improvement across quarters and made its stakeholders proud. Despite the sharp slowdown in loan sanction pipeline, sufficient capital, good margins and asset quality, IFC status and government’s major shareholding makes us positive on the company. Hence, despite the haziness in near term growth visibility, we maintain BUY rating on the stock.

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