Buy Power Finance Riding the power boom says UBS

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􀂄 Leading power generation finance company; growth momentum to sustain
Power Finance Corporation (PFC) is India’s leading power infrastructure finance
company with a 20% market share. We expect it to be a key beneficiary of strong
spending in the power sector, particularly generation. PFC’s outstanding approvals
amount to Rs1.4trn, which is 1.6x its current loan book and provides good growth
visibility. We believe the stock’s key value drivers are: 1) a 25% CAGR in its loan
book in FY10-13E; 2) NIM averaging 3.8% in FY10-13E; 3) a low cost-to-income
ratio at 5%; and 4) low credit costs, due to high exposure to government utilities.
􀂄 Capital raising to boost CAR and exposure limits
PFC’s CAR is currently 17% (minimum permissible is 15%). The company is
likely to raise US$1.2bn during the year, which will add 500bp to the CAR. We
believe this positions PFC well for strong growth ahead and enhances its exposure
limits.
􀂄 Key risks: financial position of SEBs, decline in asset yields
State electricity boards, PFC’s major borrowers, have recorded a decline in
profitability, which could impact their repayment capability. Although electricity
reforms and government backing (implicit) reduces the risk to an extent. Asset
yields could come down with increasing exposure to the private segment.
􀂄 Valuation: key beneficiary of strong power investments
We expect PFC to deliver ROE of 15-18% with an average ROA of 2.8% and an
EPS CAGR of 20% in FY11-13E. We initiate coverage with Buy rating and price
target of Rs450. We value the company using a residual income model assuming a
discount rate of 13.0%; terminal ROE of 13.0%; and a terminal year growth rate of
5%. At our PT the stock would trade at 2.6x FY12E P/BV and 17x FY12E PE.