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PFC: Diversifying capital sources
Nov 12, 2010

Power Finance Corp. (PFC) declared its 2QFY11 results. The institution has reported a 26% YoY and 10% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income rises by 27% YoY during 1HFY11 on the back of 28% YoY growth in advances.
  • Bottomline expands by just 13% YoY in 1HFY11 due to exchange rate losses, lower other income and higher tax outlay (lower tax refunds).
  • Net interest margin decreased marginally to 4.1% in 1HFY11 from 4.2% in 1HFY10.
  • Net NPA to advances remain negligible at 0.01% at the end of 2QFY11.
  • Capital adequacy ratio (CAR) stands at 17.4% at the end of 2QFY11.


Consolidated numbers...
Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Income from operations 20,030 25,308 26.4% 38,945 49,354 26.7%
Interest expended 12,407 15,895 28.1% 24,283 30,791 26.8%
Net Interest Income 7,623 9,414 23.5% 14,662 18,563 26.6%
Net interest margin       4.2% 4.1%  
Other Income 435 76 -82.5% 449 205 -54.3%
Operating expense 231 357 54.9% 401 364 -9.4%
Provisions and contingencies 10 16 55.3% 19 24 27.6%
Exchange rate (gain) /loss 177 (515)   (454) 157  
Profit before tax 7,640 9,631 26.1% 15,145 18,224 20.3%
Tax 1,261 2,623   3,216 4,692  
Effective tax rate 16.5% 27.2%   21.2% 25.7%  
Profit after tax/ (loss) 6,379 7,008 9.9% 11,928 13,532 13.4%
Net profit margin (%) 31.8% 27.7%   30.6% 27.4%  
No. of shares (m)       1,148 1,148  
Book value per share (Rs)*         127.3  
P/BV (x)         2.9  
* (Book value as on 30th September, 2010)

What has driven performance in 1HFY11?
  • The generation sector comprised the largest allocation of PFCs loan book in 1HFY11 (83%). Private sector projects enjoyed a marginally higher allocation 7% as compared to 6% in 1HFY10. This is keeping in mind the higher contribution of private sector to power infrastructure projects during the 12th 5-year plan. The company reduced its loans to the state governments while it increased contribution to the central sector.

  • PFC managed to grow its advances by 28% YoY in 1HFY11 despite lower average credit growth in the banking sector. The 63% YoY growth in PFCs disbursements were on the back of a 25% YoY growth in sanctions. Being the nodal agency designated by the Government of India for financing power projects in the country, PFC managed to grow its asset book in 1HFY11 faster than the growth in infrastructure sector in the past 9 to 12 months.

    Dynamic growth
    (Rs m) 1HFY10 1HFY11 Change
    Sanctions 348,280 435,370 25.0%
    Disbursements 88,620 144,680 63.3%
    D / S 25% 33%  
    Advances 685,670 879,060 28.2%
    Sanctions Breakup
    Generation 75% 65%  
    Transmission 14% 8%  
    Distribution 0% 0%  
    APDRP 7% 18%  
    Others 4% 8%  

  • PFCs other income fell in 1HFY11 primarily because the company received lower fees on its consulting business for UMPPs (ultra mega power projects). The company also recently entered into an MoU with Nuclear Power Corporation (NPCIL) for facilitating its large capacity addition programme to set up nuclear power projects in India.

  • The company plans to start up two new subsidiaries in financing the renewable energy space as well as a subsidiary for consortium lending. This will help the company increase focus in specific areas as well as expand its scale of operations. PFC is looking at obtaining a banking license, and has appointed a consultant for the same. However, no decision has been finalised, as clarification from the RBI is still in order.

  • PFCs gross NPAs remained negligible at 0.01% while net NPAs are also 0.01% of advances in 1HFY11. The company has always been able to maintain superior asset quality. This is because of its ability to impose penalties in case of default, and withdraw benefits to its customers. Thus, it is able to mould the behavior pattern of its borrowers, so that they do not default.

What to expect?
At the current price of Rs 368, the stock is trading at a multiple of 2.5 times our estimated FY12 adjusted book value. Given the investment opportunities in infrastructure, particularly the power sector, 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 company is planning to add new subsidiaries which will help expand operations. However, being able to keep up with the growing funding needs of the private sector will be one of its major challenges.

With regards to funding, the company has a lot of new avenues for funding its growth. Its new infrastructure financing company (IFC) status, help it to diversify its borrowing base. In 1HFY11, PFC raised US$ 240 m in external commercial borrowings (ECB). This loan is for 5 years, and is denominated in JPY (Japanese Yen), and is attractively priced. The company has the option of raising US$ 260 more in ECB borrowings by end FY11, which it would like to exercise. The company also wants to issue around Rs 12-15 bn in tax free infra bonds, in keeping with its IFC status by March 2011. It will probably launch these bonds, by the end of this year, or early next year, during the tax saving season. Offloading further stake in PFC, is also part of the governments disinvestment target. The company would also like to issue fresh equity at this point, to bolster its capital base. It now needs to maintain a capital adequacy ratio of 15%, as per the IFC status.

PFCs ability to access long term funding, sustain reasonable margins and good asset quality, and its new IFC status sets it apart from financial institutions in the public sector. We retain our positive view on the stock.

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