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India Equity Research Reports, IPO and Stock News
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We met PFC management one-to-one recently. Management agreed the power sector was facing
difficult macro issues, but believed the general pessimism was overdone. Also, it stated that
PFC's asset quality remained comfortable. At 0.9x FY12F BV, the risk-reward appears
favourable. Buy.
Baby steps, but in the right direction; Shunglu committee report expected soon
In the recent past, state electricity boards (SEBs) raised electricity tariffs in the states of
Rajasthan (20-25%), Bihar (19%), Andhra Pradesh (12%), Punjab, Haryana and a few others.
According to PFC management, the Tamil Nadu Electricity Board (TNEB) will likely raise tariffs
after the state’s local elections. Also, management stated that a few SEBs had delayed
repayments by a few days, but subsequently settled their bills. Therefore, to date, there are no
defaults on loans outstanding from SEBs. The Shunglu committee is to release its report on the
power sector by the end of October/November 2011. This report is likely to consider all SEB
accounts up to FY10, discuss concerns facing the power sector and suggest a practical approach
to tackle issues facing the segment.
Hedging policy going forward; MTM loss on forex borrowings in 2QFY12
According to management, PFC will fully hedge its foreign currency borrowings, on an
incremental basis, as it has reached the internal board-approved limit (30% of net worth) on
unhedged positions. PFC holds about Rs50bn of forex borrowings (about 6% of total borrowings)
in JPY (48%), US$ (48%) and euros (2%). Of this, all of the JPY and euro, and 71% of the US$,
borrowings are unhedged. Given the rupee’s recent depreciation vs these currencies, our backof-
the-envelope calculation works out to a likely liability exchange translation loss/mark-to-market
of Rs4.5bn-5.0bn in 2QFY12 (see Table 1). Management has not confirmed or quantified the
impact. Note that these are long-dated borrowings and thereby will likely not translate into actual
losses. Our annual estimates factor in no exchange gains or losses.
Beaten down valuations provide a favourable risk-reward ratio; maintain Buy
Aggregate state-level fiscal positions appear to have improved over FY01-11. Even states with
financially weak SEBs have improved their debt-to-state GDP ratios. This provides comfort
regarding the ability of states to come to the rescue of financially weak SEBs, if needed (see our
report A fresh look at state finances, dated 30 August 2011). At the current market price, the
stock trades at 0.9x FY12F book value and 6.0x FY12F earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We met PFC management one-to-one recently. Management agreed the power sector was facing
difficult macro issues, but believed the general pessimism was overdone. Also, it stated that
PFC's asset quality remained comfortable. At 0.9x FY12F BV, the risk-reward appears
favourable. Buy.
Baby steps, but in the right direction; Shunglu committee report expected soon
In the recent past, state electricity boards (SEBs) raised electricity tariffs in the states of
Rajasthan (20-25%), Bihar (19%), Andhra Pradesh (12%), Punjab, Haryana and a few others.
According to PFC management, the Tamil Nadu Electricity Board (TNEB) will likely raise tariffs
after the state’s local elections. Also, management stated that a few SEBs had delayed
repayments by a few days, but subsequently settled their bills. Therefore, to date, there are no
defaults on loans outstanding from SEBs. The Shunglu committee is to release its report on the
power sector by the end of October/November 2011. This report is likely to consider all SEB
accounts up to FY10, discuss concerns facing the power sector and suggest a practical approach
to tackle issues facing the segment.
Hedging policy going forward; MTM loss on forex borrowings in 2QFY12
According to management, PFC will fully hedge its foreign currency borrowings, on an
incremental basis, as it has reached the internal board-approved limit (30% of net worth) on
unhedged positions. PFC holds about Rs50bn of forex borrowings (about 6% of total borrowings)
in JPY (48%), US$ (48%) and euros (2%). Of this, all of the JPY and euro, and 71% of the US$,
borrowings are unhedged. Given the rupee’s recent depreciation vs these currencies, our backof-
the-envelope calculation works out to a likely liability exchange translation loss/mark-to-market
of Rs4.5bn-5.0bn in 2QFY12 (see Table 1). Management has not confirmed or quantified the
impact. Note that these are long-dated borrowings and thereby will likely not translate into actual
losses. Our annual estimates factor in no exchange gains or losses.
Beaten down valuations provide a favourable risk-reward ratio; maintain Buy
Aggregate state-level fiscal positions appear to have improved over FY01-11. Even states with
financially weak SEBs have improved their debt-to-state GDP ratios. This provides comfort
regarding the ability of states to come to the rescue of financially weak SEBs, if needed (see our
report A fresh look at state finances, dated 30 August 2011). At the current market price, the
stock trades at 0.9x FY12F book value and 6.0x FY12F earnings.
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