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Negatives priced in
Loan book to register 21% CAGR for FY11-14E: POWF delivered robust loan
book CAGR of 23% for FY05-11. Given outstanding sanction of `1.7trn (1.6x
FY11 loan book) and investment pick-up in FY12 (being the last fiscal of the
11th five year plan), we expect 18%/17%/17% disbursement growth in
FY12/FY13/FY14, leading to loan book CAGR of c.21% for FY11-14E.
Equity issuance to lead to stable margins in FY12E: We expect 14bps decline
in spreads for POWF in FY12E and stable spreads over FY11-14E given a)
increase in borrowing cost by 65bps over FY11-14E, b) company has a
marginally negative re–pricing schedule of `30bn i.e. excess of loan liabilities
(`230bn up for re-pricing) over loan assets (`200bn). Thus we expect POWF’s
spreads to decline by 14bps to 2.1% in FY12E and improve to 2.27% over FY12-
FY14E (on lower borrowing costs). We expect margins to remain stable over
FY11-14E, leading to 23% CAGR in NII over FY11-14E.
Higher exposure to generation is comforting factor, conservatively model
14bps of credit costs; reserves for bad debts (1% of loans) should act as
buffer: POWF has c.84% of the loans towards generation companies which are
much better financially positioned than distribution and transmission
companies which form c.13% of POWF’s book. However, given risks gencos face
from poor financial health of state-owned discoms, we conservatively factor
14bps of credit costs for FY13E and 14E. Further, POWF maintains reserve for
bad debts (c.1% of O/S loan book) which should act as a buffer in case of any
restructuring/NPLs.
Solid 20% net profit CAGR over FY11-14E with ROE of c.18%: We expect
earnings CAGR of 20% over FY11-14E driven by 23% CAGR in NII on the back of
robust loan book CAGR of 21%; however, we have modeled elevated credit
costs (14bps in FY14E vs 4bps in FY11). Return ratios should remain healthy
with ROA of 2.6% and ROE of 18% in FY14E.
Current valuations at 0.95x 1yr fwd book (down from a peak of 2.9x);
initiate coverage with BUY and TP of `205: POWF has witnessed significant
de-rating from peak multiple of 2.9x 1yr fwd book to 0.95x currently. We
believe current valuations are attractive at 0.9x FY13E book with dividend yield
of c.5% (based on FY13E dividend). We value the stock at 1x FY14P/B (at 1.05x
Mar’14 ABV; adjusted for reserves for bad and doubtful debt), implying Mar’13
target price of `205, upside of c.30%, including dividend
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Negatives priced in
Loan book to register 21% CAGR for FY11-14E: POWF delivered robust loan
book CAGR of 23% for FY05-11. Given outstanding sanction of `1.7trn (1.6x
FY11 loan book) and investment pick-up in FY12 (being the last fiscal of the
11th five year plan), we expect 18%/17%/17% disbursement growth in
FY12/FY13/FY14, leading to loan book CAGR of c.21% for FY11-14E.
Equity issuance to lead to stable margins in FY12E: We expect 14bps decline
in spreads for POWF in FY12E and stable spreads over FY11-14E given a)
increase in borrowing cost by 65bps over FY11-14E, b) company has a
marginally negative re–pricing schedule of `30bn i.e. excess of loan liabilities
(`230bn up for re-pricing) over loan assets (`200bn). Thus we expect POWF’s
spreads to decline by 14bps to 2.1% in FY12E and improve to 2.27% over FY12-
FY14E (on lower borrowing costs). We expect margins to remain stable over
FY11-14E, leading to 23% CAGR in NII over FY11-14E.
Higher exposure to generation is comforting factor, conservatively model
14bps of credit costs; reserves for bad debts (1% of loans) should act as
buffer: POWF has c.84% of the loans towards generation companies which are
much better financially positioned than distribution and transmission
companies which form c.13% of POWF’s book. However, given risks gencos face
from poor financial health of state-owned discoms, we conservatively factor
14bps of credit costs for FY13E and 14E. Further, POWF maintains reserve for
bad debts (c.1% of O/S loan book) which should act as a buffer in case of any
restructuring/NPLs.
Solid 20% net profit CAGR over FY11-14E with ROE of c.18%: We expect
earnings CAGR of 20% over FY11-14E driven by 23% CAGR in NII on the back of
robust loan book CAGR of 21%; however, we have modeled elevated credit
costs (14bps in FY14E vs 4bps in FY11). Return ratios should remain healthy
with ROA of 2.6% and ROE of 18% in FY14E.
Current valuations at 0.95x 1yr fwd book (down from a peak of 2.9x);
initiate coverage with BUY and TP of `205: POWF has witnessed significant
de-rating from peak multiple of 2.9x 1yr fwd book to 0.95x currently. We
believe current valuations are attractive at 0.9x FY13E book with dividend yield
of c.5% (based on FY13E dividend). We value the stock at 1x FY14P/B (at 1.05x
Mar’14 ABV; adjusted for reserves for bad and doubtful debt), implying Mar’13
target price of `205, upside of c.30%, including dividend
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