POWER FINANCE CORP Core performance intact– Edelweiss

Visit http://indiaer.blogspot.com/ for complete details �� ��


POWER FINANCE CORP
Core performance intact


􀂄 Strong core operating performance
Power Finance Corporation (PFC) reported strong core operating performance
with loan book growing 28% Y-o-Y and NIMs sustaining at high level of 4.1% in
Q2FY11. This led to 24% Y-o-Y (4.4% Q-o-Q) growth in net interest income to
INR 8.96 bn. The company reported PAT of INR 7.01 bn which included extra
ordinaries:
• Prior period income tax incl. interest of INR 28 mn (INR 20 mn net of tax).
• MTM gains of INR 514.6 mn on forex borrowings (net of tax ~INR 390 mn).
• INR 226 mn of nodal agency fees and reimbursement of expenses on APDRP
schemes (based on terms finalised by MoP).

Adjusted for this, PAT grew 16% Y-o-Y to INR 6.3 bn during the quarter.


􀂄 Strong disbursement growth
Disbursements grew strongly at 40% Y-o-Y to INR 63.4 bn and loan book grew
28% Y-o-Y to INR 879 bn. Unutilised sanctions were INR 1.63 tn, of these,
~65% were towards projects where documents have been executed. Further,
more than 20% of these utilised sanctions are in favour of private projects. This
trend suggests better traction in disbursements than in previous years. We
continue to maintain a healthy outlook on disbursement—26%—and build in loan
CAGR of 24% over FY10-12E.

􀂄 Spreads sustained at around ~ 2.7%
Spreads during the quarter came in at around 2.7%, marginal slip of 5bps Q-o-
Q. Adjusting for one-off fees of INR 280 mn on raising overseas borrowing, PFC’s
spreads are at 2.8%. Margins are stable at ~4.1% as 17bps increase in cost of
funds was offset by 13bps increase in lending yields. Management, however,
highlighted that with increasing leverage, margins are expected to trend down,
but spreads will sustain at the current level. Due to appropriately matched ALM,
effective pricing power and benefit of infrastructure finance company (IFC)
status, we expect PFC’s spreads to sustain over 2.4-2.5% in FY10-12E.

􀂄 Outlook and valuations: Positive; maintain ‘BUY’
Led by strong outlook on business coupled with steady margins we expect 21%
CAGR in earnings over FY10-12E. We are maintaining our EPS estimate
(excluding forex MTM losses) at INR 22.3 for FY11 and INR 27.0 for FY12 and
average RoE of ~19% over FY10-12E. Management, therefore, indicated that it
will tap capital markets in the next 6-9 months to meet CAR requirement of 15%
under the IFC status. The stock is currently trading at 2.4x FY12E book and
13.7x FY12E earnings. We maintain ‘BUY/ Sector Outperformer
recommendation/rating on the stock.