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Background
Power Finance Corporation Limited (PFC) is a Navratna Public Sector
Unit, established in July 1986. PFC is one of the leading power sector
public financial institutions and provides fund as well as non fund based
finances for entire gamut of power related activities. Apart from this it
also provides technical and management advisory and consultancy
services in the power sector. PFC has more than 20% share in the power
financing business of the country.
¾ Demand to remain strong in power sector
PFC is one of the key players for the financing of power projects. Owing
to huge demand‐supply gap in power sector the government is focusing
on the development of more power projects which in turn would boost
the business of PFC. A tentative capacity addition of approximately
100,000 MW has been envisaged for the 12th Plan.
¾ Disbursals to witness strong growth
PFC enjoys a leadership position in the power financing space. In our
view PFC is well placed to leverage the strong demand for financing in
the power sector. PFC has an outstanding sanction book of Rs 171,000
crs as on December 2010. We believe that the outstanding sanctions will
convert into disbursements in the near to medium term.
¾ High interest margins
PFC has reported a consistent improvement in its interest spreads and
margins in the last few years due to upward re‐pricing of yields on its
asset portfolio coupled with a sharp decline in wholesale fund rates. We
believe the Infrastructure Finance Company (IFC) status would help the
company to stabilize its interest spread and NIM.
¾ Healthy asset quality
Despite its concentration on single sector and significant exposure to
State Electricity Board (SEB’s), PFC has managed to keep its net NPAs at
nearly zero percent resulting from its strong credit quality and sufficient
asset coverage. PFC’s asset quality has remained healthy without any
major slippages in the past few years.
Objects of the Issue
• Augment its capital base to ensure compliance with
requisite capital adequacy norms and to meet its future
capital requirements arising out of growth in business
• General corporate purpose
Company overview
Power Finance Corporation Limited (PFC) is a Navratna Public Sector Unit, established in
July 1986. PFC is one of the leading power sector public financial institutions and
provides fund as well as non fund based finances for entire gamut of power related
activities. 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. Apart from this, it also
provides technical and management advisory and consultancy services in the power
sector. PFC has more than 20% share in the power financing business of the country.
For 9MFY11, PFC sanctioned loans worth Rs 61, 077 crs while its total disbursements
were Rs.22,270 crs. Its loan book stood at Rs 99,571 crs as on March 2011. The company
has major focus on generation which constituted almost 85% of the loan book as on
March 2011.
Investment Rationale
9 Demand to remain strong in power sector
India has historically witnessed shortages in energy and peak power requirement.
According to the Central Electricity Authority's ("CEA") monthly review of the power
sector ("CEA Monthly Review") published in February 2011, the total energy deficit and
peak power deficit for February 2011 was approximately 7.8% and 10.2% respectively.
In order to cope with the country’s rising power requirement and to upgrade
transmission and distribution (T&D) infrastructure, significant investments are required
in the 12th five year plans. A tentative capacity addition of approximately 100,000 MW
has been envisaged for the 12th Plan. Out of this an estimated 74,000 MW is expected
from thermal power; 20,000 MW from hydro power; 3,400 MW from nuclear power and
2,500 MW from lignite respectively. The total fund required in order to achieve the
targeted capacity addition will be approximately Rs 11,000 bn.
PFC is one of the key players for the financing of power projects. Due to the huge
demand‐supply gap in power sector and massive requirement of power, the government
is focusing on the development of more power projects which in turn would boost the
business of PFC. The low per capita consumption of electricity in India compared to the
world average presents significant potential for sustainable growth in the demand for
electric power in India.
9 Disbursals to witness strong growth
PFC enjoys a leadership position in the power financing space. In our view PFC is well
placed to leverage the strong demand for financing in the power sector. The company
finances both Generation and Transmission & Distribution (T&D) projects but it enjoys a
higher market share in generation projects. Generation projects constitute
approximately 85% of PFCs loan book as on December 2010.
PFC has grown its loan book at a CAGR of 23% over FY06‐FY11 whereas its sanctions and
disbursements have grown at a CAGR of 27% and 24% respectively. We believe that loan
demand would remain strong for PFC driven by robust investments planned in the power
sector for the 12th plan. PFC has an outstanding sanction book of Rs 171,000 crs as on
December 10. We believe that the outstanding sanctions will convert in disbursements in
the near to medium term. Post dilution, PFC’s debt to equity ratio will be around 3.8
times from current 5.3 times which will provide significant growth opportunities to PFC.
In addition, the company’s capital adequacy ratio is expected to improve from current
15.94% which will enable the company to grow at a higher rate.
9 High interest margins
PFC has reported a consistent improvement in its interest spreads and margins in the last
few years due to upward re‐pricing of yields on its asset portfolio coupled with a sharp
decline in wholesale fund rates. PFC’s interest spreads have improved from 1.94% in
FY07 to 2.76% in 9MFY11 whereas its margins have improved from 3.5% in FY07 to 4.1%
in 9MFY11. Management has indicated that spreads will improve to 3.0% in FY12 from
2.76% in 9MFY11.
PFC has been classified as Infrastructure Finance Company (IFC) in July 2010. As a result
PFC is now eligible to issue infrastructure bonds and foreign borrowings; which in turn
would facilitate PFC to borrow funds at lower cost. Hence we believe the IFC status
would help the company to stabilize its interest spread and NIM.
9 Healthy asset quality
Despite its concentration on single sector and significant exposure to State Electricity
Board (SEB’s), PFC has managed to keep its net NPAs at nearly zero percent resulting
from its strong credit quality and sufficient asset coverage. PFC’s asset quality has
remained healthy without any major slippages in the past few years. GNPA and NNPA
have remained at almost minimal levels in the last five years. At present the gross NPA
for the company is 0.02% while the net NPA is 0.01%. However, there may be some
pressures on the company’s asset quality in the near to medium term as 65% of PFC’s
loan book is to State Electricity Boards (SEB) which may result in NPA’s going forward.
9 CARE and CRISIL Rating
PFC enjoys the highest credit ratings of "AAA" and "LAAA" for its long‐term domestic
borrowings and "P1+" and "A1+" for its short‐term borrowings from CRISIL and ICRA
respectively. International credit rating agencies Moody's, Fitch and Standard & Poor's
have granted long‐term foreign currency issuer ratings of "Baa3", "BBB‐" and "BBB‐",
respectively, which are at par with the sovereign ratings for India.
9 Increasing exposure to private players to mitigate risk from SEBs
PFC’s exposure to private players is likely to increase going forward, with rising
proportion of investments from the private sector. As on 31 December 2010 PFC has
provided 7.1% of its total loan book to private sectors. PFC has started increasing its
exposure to private sector due to probable losses from SEB’s. 65% of PFC’s loan book is
to SEB which are currently suffering from poor commercial performance and poor socio
political environment. Rising SEB losses for execution in some power projects is likely to
raise the risk profile of PFCs balance sheet
Being a wholesale financier to large power projects, the ticket size of PFC’s loan
disbursals is high. PFC’s exposure norms to SEBs are also relaxed as it is not required to
follow RBI norms as far as SEBs are concerned.
Overall we believe that the balance sheet risk of PFC is well placed in the short term as
underlying projects are viable and the state government is likely to support SEBs.
However, increasing exposure to private players would further increase the risk profile of
its balance sheet due to lack of support from the state government for private sector
utilities in adverse conditions.
Key Concerns
9 Risk involved in repayment of loans
Large capital outlay and long repayment cycles makes power projects
susceptible to changes in various factors such as interest rates, regulations and
policies and execution delays which may have an impact on the company’s
projects’ viability which will further impact the repayment of loans.
9 Losses from SEBs
Any financial instability of SEBs or State power utilities (SPUs) could have an
adverse impact on asset quality of PFC as it lends approximately 65% of its total
outstanding loan to state sector. However we believe that as SEBs/SPUs are
backed by government body; hence there should not be any major adverse
effect on its operations.
9 Increase in borrowing cost
Increase in interest rate would increase the interest cost of the company as it
borrows a huge sum at market rates. If the company could not pass on the
increased burden due to higher interest rate, then it would impact the
company’s profitability.
We have compared PFC with Rural Electrification Corporation (REC). PFC is larger in size
as compared to REC with total loan assets at 92,118 crs. PFC’s loan sanctions and
disbursements are significantly higher than REC during 9M 2011. PFC’s NIM and RoE are
marginally lower than REC. However, going forward the spreads are likely to increase
given the IFC status enjoyed by the company. Management has indicated that spreads
will improve to 3% in FY12 from 2.76% in 9MFY11. Post dilution, PFC’s debt to equity
ratio will be around 3.8 times which is quite attractive as compared to REC and will
provide significant growth opportunities to PFC.
On valuation front, at the price band of Rs 193‐203, PFC is priced at 10.15x/10.68x P/E of
its FY11 EPS of Rs 19.0 whereas 1.34x/1.39x P/BV of its post issue book value of Rs
144.1/145.7 respectively. Whereas its closest competitor REC is trading at 1.76x P/BV of
its BV of Rs. 127.06. PFC is trading at 1.2x P/BV of the consensus FY12 estimates and 1.0x
P/BV of FY13 consensus estimates, which makes it attractive at current levels.
Considering the larger size, leadership position in power financing, strong brand image,
good track record of management and attractive valuations we recommend investors to
‘SUBSCRIBE’ to the issue with a medium to long‐term perspective.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Background
Power Finance Corporation Limited (PFC) is a Navratna Public Sector
Unit, established in July 1986. PFC is one of the leading power sector
public financial institutions and provides fund as well as non fund based
finances for entire gamut of power related activities. Apart from this it
also provides technical and management advisory and consultancy
services in the power sector. PFC has more than 20% share in the power
financing business of the country.
¾ Demand to remain strong in power sector
PFC is one of the key players for the financing of power projects. Owing
to huge demand‐supply gap in power sector the government is focusing
on the development of more power projects which in turn would boost
the business of PFC. A tentative capacity addition of approximately
100,000 MW has been envisaged for the 12th Plan.
¾ Disbursals to witness strong growth
PFC enjoys a leadership position in the power financing space. In our
view PFC is well placed to leverage the strong demand for financing in
the power sector. PFC has an outstanding sanction book of Rs 171,000
crs as on December 2010. We believe that the outstanding sanctions will
convert into disbursements in the near to medium term.
¾ High interest margins
PFC has reported a consistent improvement in its interest spreads and
margins in the last few years due to upward re‐pricing of yields on its
asset portfolio coupled with a sharp decline in wholesale fund rates. We
believe the Infrastructure Finance Company (IFC) status would help the
company to stabilize its interest spread and NIM.
¾ Healthy asset quality
Despite its concentration on single sector and significant exposure to
State Electricity Board (SEB’s), PFC has managed to keep its net NPAs at
nearly zero percent resulting from its strong credit quality and sufficient
asset coverage. PFC’s asset quality has remained healthy without any
major slippages in the past few years.
Objects of the Issue
• Augment its capital base to ensure compliance with
requisite capital adequacy norms and to meet its future
capital requirements arising out of growth in business
• General corporate purpose
Company overview
Power Finance Corporation Limited (PFC) is a Navratna Public Sector Unit, established in
July 1986. PFC is one of the leading power sector public financial institutions and
provides fund as well as non fund based finances for entire gamut of power related
activities. 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. Apart from this, it also
provides technical and management advisory and consultancy services in the power
sector. PFC has more than 20% share in the power financing business of the country.
For 9MFY11, PFC sanctioned loans worth Rs 61, 077 crs while its total disbursements
were Rs.22,270 crs. Its loan book stood at Rs 99,571 crs as on March 2011. The company
has major focus on generation which constituted almost 85% of the loan book as on
March 2011.
Investment Rationale
9 Demand to remain strong in power sector
India has historically witnessed shortages in energy and peak power requirement.
According to the Central Electricity Authority's ("CEA") monthly review of the power
sector ("CEA Monthly Review") published in February 2011, the total energy deficit and
peak power deficit for February 2011 was approximately 7.8% and 10.2% respectively.
In order to cope with the country’s rising power requirement and to upgrade
transmission and distribution (T&D) infrastructure, significant investments are required
in the 12th five year plans. A tentative capacity addition of approximately 100,000 MW
has been envisaged for the 12th Plan. Out of this an estimated 74,000 MW is expected
from thermal power; 20,000 MW from hydro power; 3,400 MW from nuclear power and
2,500 MW from lignite respectively. The total fund required in order to achieve the
targeted capacity addition will be approximately Rs 11,000 bn.
PFC is one of the key players for the financing of power projects. Due to the huge
demand‐supply gap in power sector and massive requirement of power, the government
is focusing on the development of more power projects which in turn would boost the
business of PFC. The low per capita consumption of electricity in India compared to the
world average presents significant potential for sustainable growth in the demand for
electric power in India.
9 Disbursals to witness strong growth
PFC enjoys a leadership position in the power financing space. In our view PFC is well
placed to leverage the strong demand for financing in the power sector. The company
finances both Generation and Transmission & Distribution (T&D) projects but it enjoys a
higher market share in generation projects. Generation projects constitute
approximately 85% of PFCs loan book as on December 2010.
PFC has grown its loan book at a CAGR of 23% over FY06‐FY11 whereas its sanctions and
disbursements have grown at a CAGR of 27% and 24% respectively. We believe that loan
demand would remain strong for PFC driven by robust investments planned in the power
sector for the 12th plan. PFC has an outstanding sanction book of Rs 171,000 crs as on
December 10. We believe that the outstanding sanctions will convert in disbursements in
the near to medium term. Post dilution, PFC’s debt to equity ratio will be around 3.8
times from current 5.3 times which will provide significant growth opportunities to PFC.
In addition, the company’s capital adequacy ratio is expected to improve from current
15.94% which will enable the company to grow at a higher rate.
9 High interest margins
PFC has reported a consistent improvement in its interest spreads and margins in the last
few years due to upward re‐pricing of yields on its asset portfolio coupled with a sharp
decline in wholesale fund rates. PFC’s interest spreads have improved from 1.94% in
FY07 to 2.76% in 9MFY11 whereas its margins have improved from 3.5% in FY07 to 4.1%
in 9MFY11. Management has indicated that spreads will improve to 3.0% in FY12 from
2.76% in 9MFY11.
PFC has been classified as Infrastructure Finance Company (IFC) in July 2010. As a result
PFC is now eligible to issue infrastructure bonds and foreign borrowings; which in turn
would facilitate PFC to borrow funds at lower cost. Hence we believe the IFC status
would help the company to stabilize its interest spread and NIM.
9 Healthy asset quality
Despite its concentration on single sector and significant exposure to State Electricity
Board (SEB’s), PFC has managed to keep its net NPAs at nearly zero percent resulting
from its strong credit quality and sufficient asset coverage. PFC’s asset quality has
remained healthy without any major slippages in the past few years. GNPA and NNPA
have remained at almost minimal levels in the last five years. At present the gross NPA
for the company is 0.02% while the net NPA is 0.01%. However, there may be some
pressures on the company’s asset quality in the near to medium term as 65% of PFC’s
loan book is to State Electricity Boards (SEB) which may result in NPA’s going forward.
9 CARE and CRISIL Rating
PFC enjoys the highest credit ratings of "AAA" and "LAAA" for its long‐term domestic
borrowings and "P1+" and "A1+" for its short‐term borrowings from CRISIL and ICRA
respectively. International credit rating agencies Moody's, Fitch and Standard & Poor's
have granted long‐term foreign currency issuer ratings of "Baa3", "BBB‐" and "BBB‐",
respectively, which are at par with the sovereign ratings for India.
9 Increasing exposure to private players to mitigate risk from SEBs
PFC’s exposure to private players is likely to increase going forward, with rising
proportion of investments from the private sector. As on 31 December 2010 PFC has
provided 7.1% of its total loan book to private sectors. PFC has started increasing its
exposure to private sector due to probable losses from SEB’s. 65% of PFC’s loan book is
to SEB which are currently suffering from poor commercial performance and poor socio
political environment. Rising SEB losses for execution in some power projects is likely to
raise the risk profile of PFCs balance sheet
Being a wholesale financier to large power projects, the ticket size of PFC’s loan
disbursals is high. PFC’s exposure norms to SEBs are also relaxed as it is not required to
follow RBI norms as far as SEBs are concerned.
Overall we believe that the balance sheet risk of PFC is well placed in the short term as
underlying projects are viable and the state government is likely to support SEBs.
However, increasing exposure to private players would further increase the risk profile of
its balance sheet due to lack of support from the state government for private sector
utilities in adverse conditions.
Key Concerns
9 Risk involved in repayment of loans
Large capital outlay and long repayment cycles makes power projects
susceptible to changes in various factors such as interest rates, regulations and
policies and execution delays which may have an impact on the company’s
projects’ viability which will further impact the repayment of loans.
9 Losses from SEBs
Any financial instability of SEBs or State power utilities (SPUs) could have an
adverse impact on asset quality of PFC as it lends approximately 65% of its total
outstanding loan to state sector. However we believe that as SEBs/SPUs are
backed by government body; hence there should not be any major adverse
effect on its operations.
9 Increase in borrowing cost
Increase in interest rate would increase the interest cost of the company as it
borrows a huge sum at market rates. If the company could not pass on the
increased burden due to higher interest rate, then it would impact the
company’s profitability.
We have compared PFC with Rural Electrification Corporation (REC). PFC is larger in size
as compared to REC with total loan assets at 92,118 crs. PFC’s loan sanctions and
disbursements are significantly higher than REC during 9M 2011. PFC’s NIM and RoE are
marginally lower than REC. However, going forward the spreads are likely to increase
given the IFC status enjoyed by the company. Management has indicated that spreads
will improve to 3% in FY12 from 2.76% in 9MFY11. Post dilution, PFC’s debt to equity
ratio will be around 3.8 times which is quite attractive as compared to REC and will
provide significant growth opportunities to PFC.
On valuation front, at the price band of Rs 193‐203, PFC is priced at 10.15x/10.68x P/E of
its FY11 EPS of Rs 19.0 whereas 1.34x/1.39x P/BV of its post issue book value of Rs
144.1/145.7 respectively. Whereas its closest competitor REC is trading at 1.76x P/BV of
its BV of Rs. 127.06. PFC is trading at 1.2x P/BV of the consensus FY12 estimates and 1.0x
P/BV of FY13 consensus estimates, which makes it attractive at current levels.
Considering the larger size, leadership position in power financing, strong brand image,
good track record of management and attractive valuations we recommend investors to
‘SUBSCRIBE’ to the issue with a medium to long‐term perspective.
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