Angel Broking, Power sector reforms to keep PFC’s NPA concerns at bay

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Power sector reforms to keep PFC’s NPA concerns at bay
In a resolution passed in the State Power Minister’s meet on July 13, 2011, the states have
agreed to take various initiatives to improve the financial health of their electricity
distribution companies as part of the power sector reform agenda. The pass-through of
production costs though higher tariffs to bridge the gap between revenue and power
purchase costs and clearance of all outstanding subsidies to state power utilities by the
respective states were the focal outcomes of the meet.
With 87% of the loans to public sector utilities, PFC’s loan book is heavily exposed to the
ailing health of state electricity boards. While we had regarded the probability of default by
SEBs as very remote considering the serious negative systemic implications, yet the
possibility of any restructuring or rescheduling of their repayments was creating headwinds
for the otherwise cheaply valued PFC stock. However, with the power sector reforms
underway and improving outlook on SEBs’ liquidity position, PFC along with other power
lending firms stand to be the biggest beneficiary of the impending improvement in the
health of state electricity boards, removing a key overhang on the stock.
PFC’s loan growth visibility remains high (expected 20–25% CAGR in loan growth over
FY2011–13), underpinned by its huge outstanding loan sanctions of `1.7lakh crore (as of
December 31, 2010). Moreover, with banks having seen a 47% CAGR in power sector
lending in the past two years, their exposures in most cases have reached
close to board-mandated limits, creating even more space for specialised lenders such as
PFC to grow.


At the CMP, the stock is trading at 1.2x FY2013 P/ABV. Historically, the stock has traded at
1.2–2.2x one-year forward ABV with a median of 1.7x. We have assigned an FY2013E
P/ABV multiple of 1.4x, 20% lower than PFC’s median P/ABV multiple since listing,
to factor in any potential asset quality concerns. We reiterate our Buy rating on the stock
with a target price of `254, implying an upside of 20.1% from the CMP.