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Power Finance Corporation
2QFY11: Steady business growth, healthy margins; Buy
Steady business growth, healthy margins. PFC reported 22%
yoy rise in net profit to `7bn (adjusted for extraordinary and oneoffs),
led by strong loan growth and largely stable margins (at
+4%). We retain Buy on the stock as we expect the strong
business growth, superior margins and negligible credit cost to
sustain high RoA and RoE, of 3% and 21% respectively.
Loans up 28%. The loan book grew 28% yoy to `879bn.
Disbursements were up 40% yoy to `63bn. Private Sector share in
disbursement stood at 16% in 1HFY11 compared with 6.8% in
outstanding loan book. Quarterly sanctions were the highest ever,
at `297bn (up 84% yoy). A sanction pipeline of over `1.5trn is
likely to drive the 26% CAGR in loans over FY10-13e.
Healthy NIM at +4%. Yield on loans and cost of funds rose
13bps and 17bps qoq respectively. As a result, spread and NIM
remained largely stable qoq at 2.7% and 4.1% respectively. With
increase in wholesale borrowing cost, we have assumed a 10%
drop in spreads/margins in FY11e (from FY10).
Board approval for capital raising. CAR, as of 2QFY11, stood
at 17.4% (vs. 15% mandatory for IFCs). PFC has passed board
resolution for capital raising of up to 20% of paid up capital.
Management has indicated dilution before Jun ’11.
Valuation and risks. At our target price, PFC would trade at 3x
FY11e and 2.6x FY12e PBV. Risks: Slowdown in power sector
investment, regulatory changes and poor health of SEBs.
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