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PFC (POWF)
Banks/Financial Institutions
Strong growth; headwinds for NIM. PFC reported 3QFY11 PAT of Rs6.58 bn, up
17% yoy and 4% below estimates. Strong loan growth (27%) and stable NIM
underpinned core growth. We expect loan growth to remain strong as power
generation capex typically picks up by the end of the (5-year) Plan. Higher borrowing
rates will likely put pressure on spreads. We find downside risks on our margins
estimate in the current environment, and would await better price points despite the
recent correction. Retain REDUCE with price target of Rs300 (Rs325 earlier).
Loan growth strong at 27%
PFC reported 27% loan growth on the back of 20% growth in disbursements during 3QFY11. We
are modeling 27% loan growth for PFC in FY2011E and FY2012E; we expect loan growth to
moderate to about 22% in FY2013E and are revising our estimates accordingly.
We would like to highlight that PFC’s loan growth picked up in the recent past (29% in 1QFY11,
28% in 2QFY11) as compared to 22% CAGR between FY2007 and FY2010.
High capex in generation segment. Capex in the generation segment typically picks up towards
the end of the 5-year Plan thereby driving higher growth for PFC. Notably, generation has been a
major growth driver, responsible for 65% of the disbursements and 89% of the loan growth
between April and December 2010.
Visibility on loan pipeline remains strong. PFC has outstanding (undisbursed) approvals of
Rs1.7 tn from which it has already executed documents for proposals of Rs1 tn (i.e. 1.1X current
loan book).
Private sector playing bigger role. The share of private sector will clearly increase over time—
about 23% of its outstanding approvals are driven by private players as compared to 7% share in
the current loan book and 14% of disbursements over the past nine months.
Margins stable qoq; may face headwinds
PFC reported NIM of 4.1% on the back of 2.7% spreads—stable for the past three quarters.
Borrowing cost declined by 10 bps qoq due to higher share of forex and short-term loans.
PFC raised forex loans equivalent to Rs10 bn in September 2010; the full impact of these loans
was visible during 3QFY11.
Short-term borrowings accounted for about 25% of increase in borrowings during the quarter.
PFC raised lending rates in September 2010 in order to pass on higher borrowings costs,
despite which asset yields declined by 8 bps qoq.
We expect margins to remain under pressure over the next few quarters and are
tweaking down our margin estimates. In 4QFY11E, about Rs47 bn of assets and Rs200
bn of liabilities will be re-priced at a higher rate (in the current interest rate regime). Since
the liabilities due for re-pricing are significantly higher than assets due for re-pricing,
margins will likely be under pressure unless PFC increases its benchmark rates sharply.
In FY2012E, about Rs280 bn of assets will be due for re-pricing. Management has
highlighted that the outstanding yield on these loans is almost equal to the current
market rates. Hence, we are not sure if the large base of assets due for re-pricing in
FY2012E will provide a buffer to margins.
Significant impact of standard asset provisioning norms, if applicable to PFC
RBI has prescribed provisioning requirements of 0.25% on all standard assets of NBFCs. It is
not clear if this will be applicable to PFC (and REC) as the current NBFC guidelines are not
applicable to Government-owned NBFCs. PFC has been growing at a fast pace but has made
negligible provisions in the past. As such, nominal standard asset provisions may be
prudential. If the guideline is applicable, PFC will likely need to make provisions of Rs2.5 bn,
which is equivalent to 33% of 4QFY11E PBT.
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