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PFC/REC
India
Operating performance remains strong. The power finance companies (PFC and
REC) reported in-line performance. Reported earnings were distorted by MTM losses;
adjusted (core) earnings were up 15-16% yoy on the back of 24-26% loan growth.
NIM declined yoy but were stable/marginally up qoq; asset quality performance was
also stable. We tweak estimates for PFC; await more details from REC. Retain ratings
and price targets – PFC (TP: Rs225, BUY); REC (TP: Rs240, BUY).
Core earnings growth at 15-16%
Power Finance Corporation (PFC) reported core earnings (PBT before forex losses) growth of 16%
yoy in 2QFY12 while Rural Electrification Corporation (REC) reported 15% growth. NII was up
21% for PFC and 16% for REC. Earnings were largely distorted by forex losses (PFC Rs5.04 bn;
REC Rs1.25 bn). Consequently, reported PAT was subdued: PFC’s PAT was down 40% yoy to
Rs4.2 bn (2% below estimates) while REC’s PAT was up yoy to Rs6.2 bn (4% above estimates).
Comfort on macro environment crucial for stock performance
We continue to believe that comfort on the macro environment remains the key sensitivity for
stock price performance. PFC’s and REC’s stocks have appreciated by over 20% from their nadir
over the last few weeks. We believe that higher comfort on the financial status of state utilities
and their likely impact on PFC and REC has likely driven the rerating. Recent tariff hikes by state
utilities are encouraging. We expect PFC and REC to deliver steady performance over the next few
quarters. Even as new project approvals in the private sector are significantly lower, the pipeline of
projects approved in the past will likely drive growth in the near term. Withdrawal/reduction of
credit by public banks to state utilities provides space for PFC and REC but also raises concerns on
these firms taking a lion’s share in funding incremental deficit.
PFC: 32% upside to target price. We are tweaking PFC’s estimates. We are reducing FY2012E
EPS by 15% to factor MTM losses on it borrowings. We expect PFC to deliver loan growth of 23%
in FY2012E and 19% in FY2013E (raised from 21% and 17%, respectively) thereby driving 20%
EPS CAGR in next two years and 17-18% RoE (excluding impact of forex losses) in the medium
term. At our price target of Rs225 (32% upside), PFC will trade at 8X PER and 1.3X PBR (1.5XAPBR)
FY2013E.
REC: higher spreads and RoE. We will revisit REC’s estimates after getting more details from the
management. We expect REC to deliver loan growth of 22% in FY2012E and 19% in FY2013E
thereby driving 12% EPS CAGR in next two years and 21% RoE (excluding impact of forex losses)
in the medium term. Notably, lower earnings growth (12% CAGR) for REC is on the back of our
assumption of 50 bps NIM compression over the next two years - if REC maintains it spreads,
earnings growth will be higher. At our price target of Rs240 (19% upside), REC will trade at 7.4X
PER and 1.4X PBR (1.5XAPBR) FY2013E.
Key highlights of 2QFY12 performance
Loan growth remains impressive
PFC reported 26% yoy and 6% qoq loan growth. The pace of growth is clearly impressiveqoq
loan growth increased to 6% qoq from 4% qoq in 1QFY12. Disbursements increased
by 37% yoy and 39% qoq. State sector was responsible for 66% of disbursements;
generation projects have driven 78% of incremental loan growth. Lending to ‘others’ (short
term etc) has increased to Rs41 bn from Rs32 bn- we need more color from the
management on this lending segment.
REC reported 24% yoy and 5% qoq loan growth.
NIM decline yoy but improve qoq
PFC’s NIM (KS –calc) increased marginally to 4% from 3.9% in 1QFY12 but was down
from 4.1% in 2QFY11.
REC’s NIM (KS –calc) was stable qoq at 4.4% but was down from 4.6% in 2QFY11.
Asset quality performance stable
PFC reported stable asset quality performance. PFC’s has gross NPLs of 0.22%. Exposure to
the hydel project in MP (Rs4 bn for REC and Rs11 bn for PFC) was considered a standard
restructured exposure by PFC while REC has classified the same as NPL in 1QFY12.
Large MTM losses on forex account
Earnings were largely distorted by forex losses (PFC Rs5.04 bn; REC Rs1.25 bn). PFC has
unhedged forex exposure of (US$383 mn; JPY42 bn and Euro23 mn) while REC has US$1.1
bn of open position (US$150 mn as on September 2011). REC proposes to hedge its entire
exposure over next few months while PFC has explicitly kept these positions unhedged. As
such, PFC’s qoq earnings will remains more volatile.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
PFC/REC
India
Operating performance remains strong. The power finance companies (PFC and
REC) reported in-line performance. Reported earnings were distorted by MTM losses;
adjusted (core) earnings were up 15-16% yoy on the back of 24-26% loan growth.
NIM declined yoy but were stable/marginally up qoq; asset quality performance was
also stable. We tweak estimates for PFC; await more details from REC. Retain ratings
and price targets – PFC (TP: Rs225, BUY); REC (TP: Rs240, BUY).
Core earnings growth at 15-16%
Power Finance Corporation (PFC) reported core earnings (PBT before forex losses) growth of 16%
yoy in 2QFY12 while Rural Electrification Corporation (REC) reported 15% growth. NII was up
21% for PFC and 16% for REC. Earnings were largely distorted by forex losses (PFC Rs5.04 bn;
REC Rs1.25 bn). Consequently, reported PAT was subdued: PFC’s PAT was down 40% yoy to
Rs4.2 bn (2% below estimates) while REC’s PAT was up yoy to Rs6.2 bn (4% above estimates).
Comfort on macro environment crucial for stock performance
We continue to believe that comfort on the macro environment remains the key sensitivity for
stock price performance. PFC’s and REC’s stocks have appreciated by over 20% from their nadir
over the last few weeks. We believe that higher comfort on the financial status of state utilities
and their likely impact on PFC and REC has likely driven the rerating. Recent tariff hikes by state
utilities are encouraging. We expect PFC and REC to deliver steady performance over the next few
quarters. Even as new project approvals in the private sector are significantly lower, the pipeline of
projects approved in the past will likely drive growth in the near term. Withdrawal/reduction of
credit by public banks to state utilities provides space for PFC and REC but also raises concerns on
these firms taking a lion’s share in funding incremental deficit.
PFC: 32% upside to target price. We are tweaking PFC’s estimates. We are reducing FY2012E
EPS by 15% to factor MTM losses on it borrowings. We expect PFC to deliver loan growth of 23%
in FY2012E and 19% in FY2013E (raised from 21% and 17%, respectively) thereby driving 20%
EPS CAGR in next two years and 17-18% RoE (excluding impact of forex losses) in the medium
term. At our price target of Rs225 (32% upside), PFC will trade at 8X PER and 1.3X PBR (1.5XAPBR)
FY2013E.
REC: higher spreads and RoE. We will revisit REC’s estimates after getting more details from the
management. We expect REC to deliver loan growth of 22% in FY2012E and 19% in FY2013E
thereby driving 12% EPS CAGR in next two years and 21% RoE (excluding impact of forex losses)
in the medium term. Notably, lower earnings growth (12% CAGR) for REC is on the back of our
assumption of 50 bps NIM compression over the next two years - if REC maintains it spreads,
earnings growth will be higher. At our price target of Rs240 (19% upside), REC will trade at 7.4X
PER and 1.4X PBR (1.5XAPBR) FY2013E.
Key highlights of 2QFY12 performance
Loan growth remains impressive
PFC reported 26% yoy and 6% qoq loan growth. The pace of growth is clearly impressiveqoq
loan growth increased to 6% qoq from 4% qoq in 1QFY12. Disbursements increased
by 37% yoy and 39% qoq. State sector was responsible for 66% of disbursements;
generation projects have driven 78% of incremental loan growth. Lending to ‘others’ (short
term etc) has increased to Rs41 bn from Rs32 bn- we need more color from the
management on this lending segment.
REC reported 24% yoy and 5% qoq loan growth.
NIM decline yoy but improve qoq
PFC’s NIM (KS –calc) increased marginally to 4% from 3.9% in 1QFY12 but was down
from 4.1% in 2QFY11.
REC’s NIM (KS –calc) was stable qoq at 4.4% but was down from 4.6% in 2QFY11.
Asset quality performance stable
PFC reported stable asset quality performance. PFC’s has gross NPLs of 0.22%. Exposure to
the hydel project in MP (Rs4 bn for REC and Rs11 bn for PFC) was considered a standard
restructured exposure by PFC while REC has classified the same as NPL in 1QFY12.
Large MTM losses on forex account
Earnings were largely distorted by forex losses (PFC Rs5.04 bn; REC Rs1.25 bn). PFC has
unhedged forex exposure of (US$383 mn; JPY42 bn and Euro23 mn) while REC has US$1.1
bn of open position (US$150 mn as on September 2011). REC proposes to hedge its entire
exposure over next few months while PFC has explicitly kept these positions unhedged. As
such, PFC’s qoq earnings will remains more volatile.
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