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PFC: Profits soar on lower interest costs
Nov 20, 2012

Power Finance Corporation (PFC) declared its results for the second quarter of the financial year 2012-13. The institution has reported a 33% YoY growth in interest income and 147% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) rises by 152.5% YoY during 2QFY13 on the back of 27% YoY growth in advances.
  • Bottomline increased by 147% YoY in 2QFY13 due to higher NII and other income.
  • Net interest margin (NIM) increased to 4.2% in 1HFY13 from 3.9% in 1HFY12.
  • Net NPA (non performing assets) to advances increases to 0.86% at the end of 2QFY13, compared to 0.19% earlier.
  • Capital adequacy ratio (CAR) stands at 17.7% at the end of 1HFY13.

Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Income from operations 31,419 41,875 33.3% 60,498 81,314 34.4%
Interest expended 25,615 27,218 6.3% 45,426 53,418 17.6%
Net Interest Income  5,804 14,656 152.5% 15,072 27,895 85.1%
Net interest margin       3.9% 4.2%  
Other Income 32 37 15.0% 194 46 -76.1%
Operating expense 313 336 7.4% 571 609 6.7%
Provisions and contingencies 13 14 12.7% 25 27 11.0%
Exchange rate (gain) /loss - -   - -  
Profit before tax 5,510 14,343 160.3% 14,671 27,306 86.1%
Tax 1,317 3,978 202.0% 3,615 7,222 99.8%
Effective tax rate 23.9% 27.7%   24.6% 26.4%  
Profit after tax/ (loss) 4,193 10,365 147.2% 11,055 20,084 81.7%
Net profit margin (%) 13.3% 24.8%   18.3% 24.7%  
No. of shares (m)         1,320  
Book value per share (Rs)*         161.3  
P/BV (x)         1.1  
* (Book value as on 30th September, 2012)

What has driven performance in 1HFY13?
  • The generation sector comprised the largest allocation of PFC's loan book in 1HFY13 (84%). Private sector projects enjoyed a higher allocation of 12% as compared to 9% in 1HFY12. The company reduced its loans to the state and central governments and to the joint sector.

  • PFC managed to grow its advances by 27% YoY in 1HFY13 despite lower average credit growth in the banking sector. This was on account of the strong pipeline of sanctions the company already had in place. Even with a slowdown in infrastructure activity in the country, especially in the power sector, the growth in new sanctions picked up. However this was on a lower base seen last year. PFC saw a 23% YoY growth in disbursements. Sanctions increased by 47% YoY in 1HFY13.

  • The company has a large order book (outstanding sanctions) of Rs 1.7 trillion as of September 2012. 43% of these sanctions already have their documents executed and disbursements have commenced.

    Growth sees a comeback...
    (Rs m) 1HFY12 1HFY13 Change
    Sanctions 283,980 417,320 47.0%
    Disbursements 142,340 175,550 23.3%
    D / S 50% 42%  
    Advances 1,103,770 1,403,760 27.2%
    Sanctions Breakup
    Generation 75% 36%  
    Transmission 5% 10%  
    Distribution 16% 2%  
    Others 5% 52%  

  • PFC was able to improve its margins to 4.2% from 3.9% in 1HFY12. This was on the back of higher yields, to counter the increasing cost of funds. The spreads (difference between lending rate and costs) have also improved to 2.7% in 1HFY13 from 2.3% earlier. Provided that the central bank keeps its rates steady, the institution will be able to improve its spreads. Last year, margins had dipped due to the RBI's aggressive monetary policy.

  • PFC is expected to shortly enter a joint venture with Tata Capital for setting up a US$ 1 bn private equity (PE) fund. The fund so formed will be a joint venture between Tata Capital and PFC in the ratio 51:49. Initially, in the first stage, US$ 300 m will be used to set up the fund and later on, the total investment will be US$ 1 bn. The funds will be used to buy stakes in power projects and maybe even coal mines.

  • PFC's gross NPAs increased to 0.97% of its total loans at the end of 2QFY13, compared to 0.22% at the end of 2QFY12. Net NPAs were 0.86% at the end of the quarter, compared to 0.19% earlier. However, asset quality has been maintained and there have been no further slippages this quarter. The institution has also started making a provision for its standard assets upto a total of 0.25%. This year it will create a provision of 0.08% followed by 0.08% over the next two years till FY15, which will give the company additional comfort in case any such requirement arises.

What to expect?
At the current price of Rs 177, the stock is trading at a multiple of 0.9 times its FY15 adjusted book value. There have been numerous issues including policy inaction, environmental clearances, and concerns on the financial health of state electricity boards. However there has been some traction with regards to these issues. Coal India is expected to sign fuel supply agreements with developers.

The Power Ministry has announced a financial restructuring plan which will help the lot of various discoms. A number of discoms have already increased their tariffs.

PFC plans to start funding the overseas acquisitions of productive resources of companies such as coal mines and oil wells. We have been conservative in our estimates for the company. On the plus side, the company however has a large outstanding sanction book of Rs 1.7 trillion, which are pending disbursement. New sanctions have gained momentum and PFC was able to see a 27% growth in its loan book in 1HFY13. It has seen a 20%+ growth over the past three years. On the asset quality front, PFC hasn't seen a further deterioration in the same since FY12.

Nevertheless, the institution has far superior asset quality versus most banks in the public or private space. Over the past 25 years it has not had any bad debts written off in the state sector. The management does not expect significant deterioration in asset quality going forward on account of government guarantees, and the escrow mechanism. It also doesn't restructure terms and conditions of its advances as it lends on a project specific basis. It has not restructured any SEB (State Electricity Board) debt as such. Reserve Bank of India (RBI) monetary easing/or holding rates steady going forward should also help the institution manage its margins and spreads in a better manner as most of its liabilities are floating, while assets are fixed rate. At the current valuation the stock continues to offer attractive returns over a 2 to 3 year period. We reiterate our Hold rating on the stock as mentioned in the quarterly performance review.

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