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Power Finance Corp
Risk-reward appears balanced
PFC delivered a largely in-line performance in 3QFY11. The sanctions pipeline
provides loan growth visibility. However, macro concerns on mounting SEB
losses remain an overhang. Given the stock price correction, we believe the riskreward is balanced. We upgrade to Hold (from Sell).
3QFY11: core earnings largely in line with our expectations
Net interest income increased 24% yoy in 3QFY11 on the back of 27% yoy loan growth. The
net interest margin came down 8bp yoy to about 4.1% in 3QFY11 (flat qoq). Adjusted for
exchange gains/losses, prior period items, etc, net profit went up 23% yoy to Rs6.6bn in
3QFY11. Approvals and disbursements momentum remained strong. Net outstanding
sanctions were 1.85x loans as of December 2010, which provides visibility on loan growth.
Near term operating environment is challenging: equity dilution to aid margins
PFC is a wholesale funded non-bank financial institution that is primarily in the business of
financing power generation projects (85% of loan book, see chart 1). The three-month
certificate of deposit rate (CD) has gone up 150bp qoq and 465bp yoy to 9.1%, while the
one-year CD has gone up to 9.8% (up 145bp qoq and 380bp yoy). However, the pricing
ability for infrastructure loans remains healthy and we believe margins will remain stable in
the medium term, partly helped by equity float in FY12. A sharp increase in wholesale cost of
funds remains a key risk to our assumption of largely stable spreads over FY11-13F.
Increasing losses at SEB remain a broad macro concern for the sector
We believe that rising commercial losses in State T&D Utilities, due to a lack of distribution
reforms, remain a key barrier to the power sector growth story. According to the Planning
Commission, commercial losses without subsidies for power distribution utilities is likely to
rise from about Rs450bn in FY10 to Rs680bn in FY11 and further to Rs1,160bn by 2014-15
(refer chart 4).
Risk-reward appears balanced: upgrade to Hold as valuations turn attractive
Our FY12 earnings estimates remain largely unchanged. Our target price remains largely
unchanged at Rs269, but we increase our forecasts for terminal ROE to 19.0% (from 18%
earlier) and cost of equity to 14% (from 13%) and shift our terminal period from 2016
onwards to 2018. At our TP, the stock would trade at 1.6x FY12F adjusted book value and
11.6x FY12F earnings.
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