Power Finance - Steady growth ::Macquarie Research,

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Power Finance
Steady growth
Event
 Maintain OP- Power Finance (PFC) reported 1Q12 PAT of Rs6.9bn, 6%
below our estimate but in line with consensus. We cut our earnings and TP to
Rs290 from Rs362, primarily to factor in slower loan growth. We maintain OP
as we believe valuations more than factor in the negatives. Our TP values the
stock at 1.6x FY13E BVPS for a 17% sustainable ROE.
Impact
 Growth resilient. Loan growth was 22%YoY this quarter. Growth was again
driven by generation loans which constitute 85% of the loan book and which
grew 25% YoY in the quarter. Sanction growth was a reasonable 17% this
quarter and management believes it can sustain a 20%+ growth easily given
that outstanding sanction book of Rs1.7tn is 5x its annual disbursal of
Rs350bn. While growth is likely to be ~20-22% mark, our earlier estimate of
25% YoY appears to be on the higher side and we have lowered our loan
growth estimate to 22%.
 NIMs better than expectations but likely to be under pressure in 2Q12. NIM
was 3.85% for 1Q12, up 37bp QoQ and better than our expectation. A key
reason could have been free equity from the company’s recent FPO.
Management has indicated that near-term pressures from higher funding costs
remain. However, through the rest of the year, NIMs should benefit from lagged
repricing of loans – it has raised its loan rates by 100bp on average over the last
6 months but this has not resulted in increase in asset yields, which have been
flat at 11.1% over last six months, even as cost of funds has gone up 45bp.
 Asset quality – making allowance for moderate deterioration. PFC
reported NPL of Rs2.2bn in 4Q11 (~0.2% of loan book) was actually a loan to
a wind power project, which it believes will be restructured and involve
minimal NPV losses. The stock has been an underperformer over perceived
risk of large losses from state electricity utilities, but we believe such largescale
losses are unlikely. Management remains steadfast in discounting
possibility of any deterioration in asset quality. However, our valuations take
into account the possibility of credit costs arising out of restructurings/ NPLs in
case of material deterioration in asset quality. We accordingly build in 0.5%
credit costs in our sustainable ROE and adjust our FY13E BVPS in our
Gordon growth model accordingly.
Earnings and target price revision
 We cut our earnings by ~8% each for FY12 and FY13E, chiefly driven by lower
loan growth and margins. Our TP cut is due to lower ROE on lower leverage.
Price catalyst
 12-month price target: Rs290.00 based on a Gordon Growth methodology.
 Catalyst: Continued momentum in growth
Action and recommendation
 Maintain Outperform.