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Power finance corporation Ltd
Earnings miss, cut PO; but Buy for growth and risk-return
3Q: Rep. profit up 17%; adj. up 23%, but +8-9% below est
PFC reported earnings of Rs6.6bn, up 17% yoy, but, it was 8-9% below our est.
owing to Fx loss of Rs280mn. Further, margins contracted by 8bps yoy owing to
some low ticket lending (to central sector). However, excluding a few one-offs (Fx
loss and nodal agency fee), adj. earnings grew by 23%. But biz. momentum still
appears strong, with volume growth of 27% yoy; disbursement growth at 20% yoy
(45% in 9MFY11); and sanctions growth at +3x yoy driving topline (up 26% yoy).
Moreover, funding costs have also declined (10bps qoq) on low cost Fx funds.
Cut FY11 profit to factor in Fx loss; Opr. level growth +25%
We have cut our earnings est. by +6% for FY11/12 to factor in Fx loss (only 11% of Fx
borrowings hedged). Hence, we now estimate net profit growth of 13% in FY11, but
operating profit growth is still est. to be very robust at +25% yoy in FY11. We est. net
profit growth of +23% in FY12. Top-line growth of +23/24% is expected to be driven by
+24-25% volume growth and margins sustaining through FY12. With rising macro
headwinds, we are not building in any margin uptick for PFC despite it having a
positive ALM gap (+85% of loans floating vs. ~65% of liabilities fixed) and ability to
raise low cost funds (Infra. bonds, ECBs, etc) vs. (banks & bonds).
Cut PO to factor in earnings cut and rising macro headwinds
We cut our PO to Rs380 to 1) factor in cut in earnings by +6% due to Fx losses and
2) rising macro headwinds. But we maintain Buy (trading at 2.3x; target P/B of 2.6x)
with potential upside of ~40% as we reckon: 1) Est. operating profit to grow +25% in
FY11 led by strong volume growth (as seen in 3Q results) and margins maintained;
2) RoAs sustaining at 2.8% and RoEs at +20%; 3) comfort on asset quality; and 4)
belief that recent fall in stock (+20% from peak) captures the downside risks
Price objective basis & risk
Power finance corporation Ltd (PWFEF)
We rate PFC as a Buy with PO of Rs380. Our PO is based on Gordon model theory
of RoE and CoE, wherein RoE is estimated at 20% and CoE at 13.5%, hence we
assign a 75-80% premium to Gordon theory to capture the strong growth
momentum. We believe growth (volume) is likely to sustain at +25% especially as
PFC remains a direct play on financing of power projects in India (key govt. focus
area). Risks are higher defaults that could lead to asset quality issues.
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