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UBS Investment Research
India Banking & Finance Sector
S ensitivity to weakening currency
PFC and REC have un-hedged foreign currency liability
A weak Rs vs US$ and JPY during the June-September Quarter could lead to
MTM losses for PFC & REC in Q2. QTD Rs has depreciated by 10% against JPY
while it has depreciated by 5.5% against $. REC has un-hedged exposure of Rs 41
bn (5.8% of borrowings) while PFC has Rs 39.9 bn (5% of overall borrowings) as
of June 2011. REC has a high sensitivity to Rs/$ while PFC is more sensitive to
Rs/JPY. As per our estimates if current currency level sustain, there could be 6-8%
downside risks to current FY12 EPS estimate & 1.5% book value impact.
However losses are notional and could reverse
Given the borrowings are long term in nature (due FY15 onwards), MTM losses
could reverse with strengthening of currency vs developed currencies. Losses also
can be lower than estimate in case companies decide to actively hedge open
position though it could lead to slightly higher cost of funds(due to hedging costs).
Drivers of the stock are structural reforms in power sector
Recent tariff hikes (Table 2) are positive developments in our view towards
improving financial health of state utilities. We believe that state utilities are
unlikely to default given importance of power for economic growth of the state and
with tighter norms by lenders, closer scrutiny by various stakeholders, state
government have little option but to improve financial viability of SEBs.
Valuation and view
We maintain our positive view on PFC & REC as valuations are pricing in stress
and ignoring medium term growth and profitability.
16 states have hiked tariffs in last 6 months
State Tariff hike
Karnataka 22%
Delhi 22%
Rajasthan 20%
Orissa 20%
Bihar 19%
Jharkhand 16%
Assam 14%
Chhattisgarh 14%
Andhra Pradesh 12%
Punjab 9%
West Bengal 9%
Gujarat 8%
Madhya Pradesh 6%
Uttarakhand 5%
Maharashtra 5%
Haryana 3%
Source: UBS estimates
Statement of Risk
We believe a sustained economic slowdown could impact the banking and
finance sector on several fronts: lead to a slowdown in credit, increase NPL risk,
impact fee income, and exert pressure on NIM.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Banking & Finance Sector
S ensitivity to weakening currency
PFC and REC have un-hedged foreign currency liability
A weak Rs vs US$ and JPY during the June-September Quarter could lead to
MTM losses for PFC & REC in Q2. QTD Rs has depreciated by 10% against JPY
while it has depreciated by 5.5% against $. REC has un-hedged exposure of Rs 41
bn (5.8% of borrowings) while PFC has Rs 39.9 bn (5% of overall borrowings) as
of June 2011. REC has a high sensitivity to Rs/$ while PFC is more sensitive to
Rs/JPY. As per our estimates if current currency level sustain, there could be 6-8%
downside risks to current FY12 EPS estimate & 1.5% book value impact.
However losses are notional and could reverse
Given the borrowings are long term in nature (due FY15 onwards), MTM losses
could reverse with strengthening of currency vs developed currencies. Losses also
can be lower than estimate in case companies decide to actively hedge open
position though it could lead to slightly higher cost of funds(due to hedging costs).
Drivers of the stock are structural reforms in power sector
Recent tariff hikes (Table 2) are positive developments in our view towards
improving financial health of state utilities. We believe that state utilities are
unlikely to default given importance of power for economic growth of the state and
with tighter norms by lenders, closer scrutiny by various stakeholders, state
government have little option but to improve financial viability of SEBs.
Valuation and view
We maintain our positive view on PFC & REC as valuations are pricing in stress
and ignoring medium term growth and profitability.
16 states have hiked tariffs in last 6 months
State Tariff hike
Karnataka 22%
Delhi 22%
Rajasthan 20%
Orissa 20%
Bihar 19%
Jharkhand 16%
Assam 14%
Chhattisgarh 14%
Andhra Pradesh 12%
Punjab 9%
West Bengal 9%
Gujarat 8%
Madhya Pradesh 6%
Uttarakhand 5%
Maharashtra 5%
Haryana 3%
Source: UBS estimates
Statement of Risk
We believe a sustained economic slowdown could impact the banking and
finance sector on several fronts: lead to a slowdown in credit, increase NPL risk,
impact fee income, and exert pressure on NIM.
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