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UBS Investment Research
Power Finance
Earnings miss on NIM decline
Event: PFC Q4 numbers 10% below expectations
PFC reported PAT of Rs 6.06 bn 10% lower than our expectations. Net profit was
flat Y/Y (declined by 8% Q/Q); adjusting for forex gains clean profit growth was
3% Y/Y and a decline of 14% Q/Q. Total revenue grew 11% Y/Y (declined by
13% QoQ). We estimate NIMs to have declined by 70 bps QoQ due to higher cost
of funds and decline in lending yields. Cost to income ratio continued to remain
low at 4% due to reimbursement of costs related to APRDP. Loan book during Q4
grew by 25% Y/Y and 8% QoQ in line with expectation to Rs 1000 bn
Impact: NIM estimates in FY12 to be lower, cutting FY12 earnings by 4%
We cut our NIM estimates further given the compression witnessed in Q4; we do
expect NIMs to stabilize at current levels with wholesale rates easing. We build in
20 bps decline in NIMs from FY11 average. We maintain our growth estimates at
23% CAGR over next two years given the strong sanction pipeline (at 1.6xFY11
loan book). Our EPS estimates stand revised by 4% to 23.8 in FY12
Action: Valuation opportunity attractive
We believe at 1.5xFY12 book, weak NIM progression is likely factored in and
valuations are attractive considering 18% RoE (post dilution) and 20% earnings
growth. Financial health of SEBs is an often cited concern; we believe risks of
defaults are low given the implicit backing of state governments
Valuation: Maintain BUY PT 320
We derive our PT using residual income model (CoE of 13.5%). At our PT stock
would trade at 2.1xFY12
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.
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
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Power Finance
Earnings miss on NIM decline
Event: PFC Q4 numbers 10% below expectations
PFC reported PAT of Rs 6.06 bn 10% lower than our expectations. Net profit was
flat Y/Y (declined by 8% Q/Q); adjusting for forex gains clean profit growth was
3% Y/Y and a decline of 14% Q/Q. Total revenue grew 11% Y/Y (declined by
13% QoQ). We estimate NIMs to have declined by 70 bps QoQ due to higher cost
of funds and decline in lending yields. Cost to income ratio continued to remain
low at 4% due to reimbursement of costs related to APRDP. Loan book during Q4
grew by 25% Y/Y and 8% QoQ in line with expectation to Rs 1000 bn
Impact: NIM estimates in FY12 to be lower, cutting FY12 earnings by 4%
We cut our NIM estimates further given the compression witnessed in Q4; we do
expect NIMs to stabilize at current levels with wholesale rates easing. We build in
20 bps decline in NIMs from FY11 average. We maintain our growth estimates at
23% CAGR over next two years given the strong sanction pipeline (at 1.6xFY11
loan book). Our EPS estimates stand revised by 4% to 23.8 in FY12
Action: Valuation opportunity attractive
We believe at 1.5xFY12 book, weak NIM progression is likely factored in and
valuations are attractive considering 18% RoE (post dilution) and 20% earnings
growth. Financial health of SEBs is an often cited concern; we believe risks of
defaults are low given the implicit backing of state governments
Valuation: Maintain BUY PT 320
We derive our PT using residual income model (CoE of 13.5%). At our PT stock
would trade at 2.1xFY12
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.
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
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