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Relatively well positioned in a tough industry
■ We initiate coverage of PFC with a Rs200 target price and NEUTRAL
rating. Compared with its twin, Rural Electrification Corporation (REC), PFC
operates in the relatively safer segments of the power sector space.
■ PFC not directly exposed to the worst risks…. PFC has limited exposure
to the heavily loss-making state-owned utilities in the distribution sector.
Further, private sector players, which are likely to face fuel supply issues
and funding risk, form only 7% of its loan book. The bulk of PFC’s exposure
is to the public sector (state government and central government) generation
projects. Here, the risks are mitigated as these entities have multiple
facilities already operating that can provide the cash flows to keep up on
payments even if a new project faces fuel supply or offtake issues.
■ … but even second order effects could be significant. However, the
generation companies (PFC’s borrowers) are exposed, as suppliers, to
state-owned distribution utilities, which are incurring losses. As the cash
flows of distribution companies deteriorate, the chances of them delaying
payments and impacting the cash flows of the generators increase. In fact,
over the last two years, days sales outstanding (DSO) of NTPC have gone
up significantly (though at ~40 days, they are still not at an alarming level).
■ We value PFC at a discount to PSU banks: Relative to PNB, BOB and
Union Bank, we expect PFC to have lower profitability and growth over the
medium term. Further, these banks have a more diversified business model
and a strong deposit franchise. These banks are trading at ~1.3x FY13E P/B,
and we value PFC at 1.1x FY13E P/B
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