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PFC: Forex losses hit bottomline

Nov 12, 2011

Power Finance Corporation (PFC) has announced second quarter results of calendar 2011(3QCY11) results. The company has reported a 17.5% YoY and 31% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income rises by 18% YoY during 2QFY12 on the back of 26% YoY growth in advances.
  • Bottomline falls by just 40% YoY in 1HFY12 due to exchange rate losses and lower other income.
  • Net interest margin (NIM) decreased to 3.9% in 1HFY12 from 4.1% in 1HFY11.
  • Net NPA to advances increases to 0.19% at the end of 2QFY12, compared to 0.01% earlier.
  • Capital adequacy ratio (CAR) stands at 18.2% at the end of 1HFY12.

Financial Performance
Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Income from operations 25,308 31,416 24.1% 49,354 60,496 22.6%
Interest expended 15,895 20,328 27.9% 30,791 39,374 27.9%
Net Interest Income 9,414 11,088 17.8% 18,563 21,121 13.8%
Net interest margin       4.1% 3.9%  
Other Income 76 34 -54.8% 205 196 -4.5%
Operating expense 357 313 -12.5% 364 571 56.9%
Provisions and contingencies 16 13 -19.0% 24 24 1.2%
Exchange rate (gain) /loss (515) 5,287   157 6,052 3753.9%
Profit before tax 9,631 5,510 -42.8% 18,224 14,670 -19.5%
Tax 2,623 1,317 -49.8% 4,692 3,615 -22.9%
Effective tax rate 27.2% 23.9%   25.7% 24.6%  
Profit after tax/ (loss) 7,008 4,193 -40.2% 13,532 11,055 -18.3%
Net profit margin (%) 27.7% 13.3%   27.4% 18.3%  
No. of shares (m)         1,320  
Book value per share (Rs)*         141.3  
P/BV (x)         1.2  
* (Book value as on 30th September, 2011)

What has driven performance in 1HFY12?
  • The generation sector comprised the largest allocation of PFCs loan book in 1HFY12 (84%). Private sector projects enjoyed a marginally higher allocation 9% as compared to 7% in 1HFY11. The company reduced its loans to the state governments while its contribution to the central sector and joint sector remained the same.

  • PFC managed to grow its advances by 26% YoY in 1HFY12 despite lower average credit growth in the banking sector. However, with a slowdown in infrastructure activity in the country, especially in the power sector, the growth in new sanctions was dismal. It saw a flat 3% YoY growth in disbursements. However sanctions fell by 32% YoY. Thus most of the incremental loans came from the existing pipeline.

    Growth takes a hit...
    (Rs m) 1HFY11 1HFY12 Change
    Sanctions 435,370 297,040 -31.8%
    Disbursements 144,680 148,840 2.9%
    D / S 33% 50%  
    Advances 879,060 1,104,210 25.6%
    Sanctions Breakup
    Generation 65% 71%  
    Transmission 8% 4%  
    Distribution 1% 7%  
    APDRP 19% 12%  
    Others 8% 5%  

  • PFC's other income fell in 1HFY12 primarily because the company received lower fees on its consulting business for UMPPs (ultra mega power projects), lease income etc. Exchange losses on its foreign borrowings (6% of total) on account of rupee depreciation however lead to a huge increase in forex losses, leading to an 18% fall in profits for the first half.

  • The company's has proposed to launch a private equity fund of USD 1 billion, which could be put in place over the next six months. It still needs to find a partner for this venture.

  • PFC's gross NPAs remained negligible at 0.22% while net NPAs are 0.19% of advances in 1HFY12, from 0.01% seen at the end of 1HFY11. The marginal increase in NPAs was on account of a private sector wind power project which was classified as an NPA in 4QFY11. This asset will remain NPA for the year according to the management. The company has not yet seen further stress on its asset quality; however how things pan out in light of a more difficult environment is yet to be seen.

What to expect?
At the current price of Rs 165, the stock is trading at an attractive multiple of 0.9 times our estimated FY14 adjusted book value. PFC has corrected significantly since last year on account of various concerns on execution of power projects. There have been numerous issues including policy inaction, environmental clearances, and concerns on the financial health of state electricity boards. However, with the new policy plan in place, we expect there to be some improvement in the sector, but this may take some time to get implemented. Irrespective, we have been extremely conservative in our estimates for FY12, and we expect a very flattish growth in the loan book on account of a slowdown in disbursements. On the plus side, the company however has a large outstanding sanction book of Rs 1.8 trillion, which are pending disbursement. Thus, even with a slowdown in new sanctions, it was still able to see a 26% growth in its loan book in 1HFY12. However, on account of the unforeseen forex losses, we may have to revise our profit estimates for FY12 slightly lower.

PFC does not expect significant deterioration in asset quality going forward on account of government guarantees, and the escrow mechanism. The company is also adequately capitalized post its FPO. PFC is also planning to access other funding sources though medium term notes and infrastructure bonds in the current financial year. However, on account of frequent equity dilution necessary to maintain a 15% capital adequacy ratio, and a growth slowdown in the sector leading to lower profitability, we expect the company's return on equity (ROE) to be depressed for the next few years. However, from at the current valuation the stock continues to offer attractive returns over a 2 to 3 year period. Hence we reiterate out BUY rating on the stock

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