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Power finance corporation Ltd
1Q: Momentum continues;
Concerns overdone, Buy
„1Q earnings growth in-line; momentum continues
PFC reported earnings of Rs6.9bn, a yoy growth of 5% (in-line); adj. for int. on IT
refund, etc. earnings grew 14% yoy. Topline (NII) grew 10% yoy, but moreover,
the pace of B/s growth has continued to be strong (22% loan growth) and margins
although down ~25bps yoy owing to rise in funding costs, have expanded qoq (by
37bps). Disbursement growth was a tad weaker (down 23% yoy), but off a very
high base of 1Q and 4Q last year. Sanctions grew 17% yoy in 1Q. Asset quality
continues to be manageable, with gross at 23bps and net at 20bps, stable qoq.
Cut growth (loan) est., but net profit to still grow at +20%
We have cut our net profit est. by +4/5% for FY12/13, as we cut loan growth est.
to +20-21% vs. historical average of +24-25%. But our net profit est. build in +20-
25bps of credit costs, post which we expect sustainable net profit growth of
+19/23% through FY12/13. Moreover, operating profit growth is still est. to be
very robust at ~27/23% yoy in FY12/13. Margins are expected to rise by at least
+15-20bps in FY12 (yoy) driven by 1) ability to raise tax free bonds (spread
differential of +100bps) and 2) equity leverage post recent FPO.
Cut PO to factor in earnings cut and rising macro headwinds
We cut our PO to Rs240 to 1) factor in cut in earnings by +4/5% and 2) rising
macro headwinds. But we maintain Buy, as we believe asset quality issues are
overdone (working capital loans to SEBs and merchant power project loans <4-
5% of loans) and risk-return is attractive, with stock trading at +1.4-1.5x FY12
book (1.2x FY13 book), with RoAs at +2.7% / RoEs at +17%. Moreover, PFC has
U/p +30% (YTD; vs. markets) and captures the downside risks and also PFC
trades at a +10-20% discount to its peers (REC, IDFC) despite better risk-profile.
Price objective basis & risk
Power finance corporation Ltd (PWFEF)
We rate PFC as a Buy with PO of Rs240. But we maintain Buy as we believe
asset quality issues are overdone (working capital loans to SEBs and merchant
power project loans together constitute <+4-5% of loans) and risk-return is
attractive, with stock trading at +1.4-1.5x FY12 book (1.2x FY13 book), with RoAs
sustaining at 2.7% and RoEs at 17% and stock U/p vs. markets (30% YTD)
captures the downside risks. Moreover, PFC is trading at a 10-20% discount to
its peers (REC, IDFC) despite better risk-profile. Growth (volume) is likely to
sustain at +20% especially as PFC remains a direct play on financing of power
projects in India (key govt. focus area). Risks are higher defualts that could lead
to asset quality issues.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Power finance corporation Ltd
1Q: Momentum continues;
Concerns overdone, Buy
„1Q earnings growth in-line; momentum continues
PFC reported earnings of Rs6.9bn, a yoy growth of 5% (in-line); adj. for int. on IT
refund, etc. earnings grew 14% yoy. Topline (NII) grew 10% yoy, but moreover,
the pace of B/s growth has continued to be strong (22% loan growth) and margins
although down ~25bps yoy owing to rise in funding costs, have expanded qoq (by
37bps). Disbursement growth was a tad weaker (down 23% yoy), but off a very
high base of 1Q and 4Q last year. Sanctions grew 17% yoy in 1Q. Asset quality
continues to be manageable, with gross at 23bps and net at 20bps, stable qoq.
Cut growth (loan) est., but net profit to still grow at +20%
We have cut our net profit est. by +4/5% for FY12/13, as we cut loan growth est.
to +20-21% vs. historical average of +24-25%. But our net profit est. build in +20-
25bps of credit costs, post which we expect sustainable net profit growth of
+19/23% through FY12/13. Moreover, operating profit growth is still est. to be
very robust at ~27/23% yoy in FY12/13. Margins are expected to rise by at least
+15-20bps in FY12 (yoy) driven by 1) ability to raise tax free bonds (spread
differential of +100bps) and 2) equity leverage post recent FPO.
Cut PO to factor in earnings cut and rising macro headwinds
We cut our PO to Rs240 to 1) factor in cut in earnings by +4/5% and 2) rising
macro headwinds. But we maintain Buy, as we believe asset quality issues are
overdone (working capital loans to SEBs and merchant power project loans <4-
5% of loans) and risk-return is attractive, with stock trading at +1.4-1.5x FY12
book (1.2x FY13 book), with RoAs at +2.7% / RoEs at +17%. Moreover, PFC has
U/p +30% (YTD; vs. markets) and captures the downside risks and also PFC
trades at a +10-20% discount to its peers (REC, IDFC) despite better risk-profile.
Price objective basis & risk
Power finance corporation Ltd (PWFEF)
We rate PFC as a Buy with PO of Rs240. But we maintain Buy as we believe
asset quality issues are overdone (working capital loans to SEBs and merchant
power project loans together constitute <+4-5% of loans) and risk-return is
attractive, with stock trading at +1.4-1.5x FY12 book (1.2x FY13 book), with RoAs
sustaining at 2.7% and RoEs at 17% and stock U/p vs. markets (30% YTD)
captures the downside risks. Moreover, PFC is trading at a 10-20% discount to
its peers (REC, IDFC) despite better risk-profile. Growth (volume) is likely to
sustain at +20% especially as PFC remains a direct play on financing of power
projects in India (key govt. focus area). Risks are higher defualts that could lead
to asset quality issues.
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