UBS-Power Finance Spreads hold up; growth steady

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UBS Investment Research
Power Finance 
Spreads hold up; growth steady  
 
„ Better than UBSe on stable spreads
Power Finance (PFC) reported Net profit (pre exceptional) of Rs 6.6 bn (up 23%
Y/Y) and net interest income of Rs 9.3 bn (up 24% Y/Y) better than UBS estimates
on back of stable spreads (2.7%) and lower costs (cost to income ratio at 3%).
Other income also came at Rs 310 mn which was better than expected. Reported
PAT growth came lower at 17% due to forex loss of Rs 180 mn

„ Spreads at 2.73%, NIM at 4.1%
NIM during the quarter came at 4.1% which was stable QoQ as the spreads
remained stable at 2.7%. Cost of funds came down by 10 bps QoQ as full benefit
of $240 mn raised in Q2 (at Libor+200bps) came through which the company
passed through as yields too corrected 8 bps QoQ. Disbursements continued to
grow at 20% while loan book grew by 27% Y/Y. Outstanding sanctions amount to
nearly 1.8x of current loan book; thus providing strong growth visibility.

„ Cost to income low at 3% in Q3; FPO likely in Q1FY12
Operating costs continues to run lower than estimated due to re-imbursement of
expenditure from APDRP schemes. According to management, the company
capital raising through follow on public offer is likely in Q1FY12; issue size
assuming current price is ~Rs 65 bn which is combination of Rs 48 bn fresh issue
and Rs 17 bn government divestment.
„ Valuation attractive; Maintain Buy
We maintain our estimates however tweak certain assumption to factor in nine
month actual. We maintain our Buy rating and residual income based PT of Rs
360. Our PT implies 2.1x FY12 (diluted) book.


Q Power Finance
Power Finance Corporation Limited (PFC) is a Navratna Public Sector Unit,
established in July 1986. It was listed in 2007 on the National Stock Exchange.
In July 2010, the RBI granted 'Infrastructure Finance Company' status to the
company. PFC is engaged in power financing and provides project term loans,
lease financing, direct discounting of bills, and short term loans. For the quarter
ended June 2010, PFC sanctioned loans worth Rs144bn while its total
disbursements were Rs.81bn. Its loan book stood at Rs856bn and total assets
were Rs909bn as at June 2010. The government holds a 90% stake in PFC.
Q Statement of Risk
We believe a sustained economic slowdown could impact the banking and
finance sector on several fronts: lead to a slowdown in credit; increase NPL risk;
impact fee income; and exert pressure on NIMs. We believe a slowdown in
power sector investment could impact the company’s growth outlook. Execution
delays could affect the cash flow generating capability of its projects.
Favourable funding options—in the form of infrastructure bonds and ECB
issuances—if disallowed, could impact the profitability of the business