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Power Finance:: Buoyancy in lending:: CLSA research
For 3QFY11 PFC reported net profit of Rs6.6bn, up 17% YoY, ahead of our
estimates. Lending activity was buoyant with loans growing by 27% YoY
driving NII growth of 26%, but profit growth was suppressed by forex
loss on unhedged forex borrowings. Higher exposure to the generation
segment provides greater visibility to loan growth, but spreads may be
under pressure due to rising cost of funds and inverted yield curve. We
expect PFC to report 25% Cagr in loans over FY10-13CL and this will
drive 19% Cagr in net profit. Maintain BUY.
Lending momentum remains buoyant
During 3QFY11, PFC’s loan book grew by 27% YoY largely driven by growth in
the power-generation segment that constitutes 84% of loans. We believe that
PFC will continue to report healthy loan growth due to higher exposure to
power-generation segment where competition from banks is lesser as tenure
of loans is longer (15-18 years) and ticket size is larger. Lower exposure to
T&D segment (11% of loans) cushions PFC against risk of slowdown in
investment by the state governments. The undisbursed amount on projects
where PFC has already commenced disbursal are 83% of the loan book to
which management sees negligible risk of delay.
Spreads improvement helped by unhedged forex borrowings
During 3QFY11 in spite of rise in wholesale borrowings costs, PFC’s spreads
expanded by 3bps QoQ to 2.73%. We believe this was partly due to rising
share of unhedged forex borrowings that cost ~400bps lesser than domestic
borrowings. However, they expose earnings to the risk of forex losses; during
3QFY11 forex losses were 3% of PBT. We expect spreads to contract going
forward due to repricing of borrowings at higher rates, however rise in share
of unhedged forex loans may help to defend spreads.
Maintain BUY
We expect PFC’s earnings to grow at 19% Cagr over FY10-13 (ex-forex gain
in FY10) led by 25% Cagr in loans. As per management, new standard asset
provisioning norm (25bps of loans) would not be applicable to PFC; but if it is
made applicable then there could be a one-time hit of ~7% to FY11 estimates
and ~1.5% in FY12-13. Capital raising (15% new shares and 5% divestment
by government) is expected in 1QFY12. Within power financiers, we continue
to prefer PFC and retain our BUY recommendation with target price of Rs350
based on 2.2x forward PB (we have cut target price as we factor higher cost
of equity). Improvement in liquidity conditions and investment outlook for
power sector are key re-rating triggers.
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