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PFC (POWF)
Banks/Financial Institutions
State sector drives growth. PFC accelerated its loan growth to 28% (up from 25% in
2QFY12) due to higher lending to state power entities largely for pre-approved
generation projects. Core earnings were almost flat qoq, up 13% yoy (5% above
estimates) on subdued spreads and stable operating expenses. Other highlights: (1) A
gas-based power plant in AP (exposure of Rs3.9 bn) slipped into NPL and (2) PFC
booked forex gain of Rs4.2 bn following the change in accounting policy. We revise
estimates by 1-4%, retain ADD with price target of Rs225 (from Rs215).
Core earnings growth at 13%
Power Finance Corporation (PFC) reported core earnings (PBT before forex losses) growth of 13%
yoy in 3QFY12 – almost flat qoq. NII was up 18% on (1) 28% loan growth and (2) yoy and qoq
decline in NIM. Earnings were largely distorted by recognition of forex gains of Rs4.2 bn (due to
the changes in accounting policy). PAT was up 69% yoy, significantly higher than our estimates
due to difference in estimate of tax rates of the forex income; PBT was up 64% yoy (3% above
estimates).
Valuation inexpensive, PFC remains a play on recovery in the sector
We expect PFC to deliver13% EPS CAGR between FY2011 and FY2014 and medium-term RoE of
17-18%. We expect PFC to deliver loan growth of 21% in FY2013 and 15% in FY2014 and
almost stable spreads of 2.5%. A likely decline in interest rates in the system and lower
competitive intensity provides us comfort on margins over the medium term. At our price target
of Rs225 (20% upside), PFC will trade at 7.7X PER and 1.2X PBR (1.5XAPBR) FY2013E.
PFC is currently trading at 6.3XPER and 1X PBR FY2013E. This works out of 1.1X FY2014E
adjusted PBR, if we build in NPLs of 3%. This (adjustment) effectively implies that 45% of the
private sector loan book (as on December 2011) is written-off.
We are relatively more comfortable on the asset quality performance of state (and central) sector
loans (90% of loan book for PFC as on December 2011) given the positive developments at state
electricity boards (SEB) over the last few months. While recently proposed tariff hikes may not, in
themselves, drive a turnaround at SEBs, but a more disciplined approach by SEBs and regulators
will likely reduce their credit risk in the medium-term.
We however believe that stress in the private sector loan book will likely be reflected over the next
few quarters. We believe that early resolution of macro issues in the sector (availability and supply
of coal, (likely) renegotiation of power purchase agreements) will affect the fortunes for these
projects and hence drive stock performance for PFC (and REC).
Key highlights of 3QFY12 performance
Loan growth accelerates
PFC reported 28% yoy and 7% qoq loan growth. The pace of growth is clearly increasing -
qoq loan growth increased to 7% qoq in 3QFY12 from 6% qoq in 2QFY12 and 4% qoq in
1QFY12. Disbursements increased by 35% yoy. State sector was responsible for 52% of
loan book accretion; generation projects have driven 83% of incremental loan growth.
Lending to ‘others’ (short term etc) has increased to Rs47 bn from Rs31 bn in 2QFY12;
management has highlighted that they are more comfortable in lending to SEBs that raise
tariff and follow most conditions decided at a state ministers conference; all incremental
short term loans have a guarantee from the State Government.
NIM declines moderately
PFC’s NIM (KS –calc) declined to 3.9% from 4% in 2QFY12 and 4.1% in 3QFY11. NIM
would increase marginally, if we adjust for the reversal of income for the NPL (Rs190 mn)
recognized during the quarter.
NPLs increase during the quarter
PFC’s gross NPLs increased to 0.5% from 0.2% qoq. A loan to AP-based power plant
slipped into the non-performing category during the quarter. The company made provision
of Rs390 mn (10% of total exposure of Rs3.9 bn). Notably, loan to an MP-based hydel
project will likely be classified as an NPL in case the power company is unable to raise equity
in FY2012; PFC has an funded exposure of Rs7 bn and non-fund based exposure of Rs4 bn
to this project.
Large MTM gains on forex account
Earnings were largely distorted by forex gains. Following the change in account policy, PFC
booked gains of Rs4.2 bn in the forex account reflecting the reversal of losses booked in
1HFY12 (Rs5.8 bn in 1HFY12). The foreign currency translation account had a debit balance
of Rs8.5 bn as on December 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
PFC (POWF)
Banks/Financial Institutions
State sector drives growth. PFC accelerated its loan growth to 28% (up from 25% in
2QFY12) due to higher lending to state power entities largely for pre-approved
generation projects. Core earnings were almost flat qoq, up 13% yoy (5% above
estimates) on subdued spreads and stable operating expenses. Other highlights: (1) A
gas-based power plant in AP (exposure of Rs3.9 bn) slipped into NPL and (2) PFC
booked forex gain of Rs4.2 bn following the change in accounting policy. We revise
estimates by 1-4%, retain ADD with price target of Rs225 (from Rs215).
Core earnings growth at 13%
Power Finance Corporation (PFC) reported core earnings (PBT before forex losses) growth of 13%
yoy in 3QFY12 – almost flat qoq. NII was up 18% on (1) 28% loan growth and (2) yoy and qoq
decline in NIM. Earnings were largely distorted by recognition of forex gains of Rs4.2 bn (due to
the changes in accounting policy). PAT was up 69% yoy, significantly higher than our estimates
due to difference in estimate of tax rates of the forex income; PBT was up 64% yoy (3% above
estimates).
Valuation inexpensive, PFC remains a play on recovery in the sector
We expect PFC to deliver13% EPS CAGR between FY2011 and FY2014 and medium-term RoE of
17-18%. We expect PFC to deliver loan growth of 21% in FY2013 and 15% in FY2014 and
almost stable spreads of 2.5%. A likely decline in interest rates in the system and lower
competitive intensity provides us comfort on margins over the medium term. At our price target
of Rs225 (20% upside), PFC will trade at 7.7X PER and 1.2X PBR (1.5XAPBR) FY2013E.
PFC is currently trading at 6.3XPER and 1X PBR FY2013E. This works out of 1.1X FY2014E
adjusted PBR, if we build in NPLs of 3%. This (adjustment) effectively implies that 45% of the
private sector loan book (as on December 2011) is written-off.
We are relatively more comfortable on the asset quality performance of state (and central) sector
loans (90% of loan book for PFC as on December 2011) given the positive developments at state
electricity boards (SEB) over the last few months. While recently proposed tariff hikes may not, in
themselves, drive a turnaround at SEBs, but a more disciplined approach by SEBs and regulators
will likely reduce their credit risk in the medium-term.
We however believe that stress in the private sector loan book will likely be reflected over the next
few quarters. We believe that early resolution of macro issues in the sector (availability and supply
of coal, (likely) renegotiation of power purchase agreements) will affect the fortunes for these
projects and hence drive stock performance for PFC (and REC).
Key highlights of 3QFY12 performance
Loan growth accelerates
PFC reported 28% yoy and 7% qoq loan growth. The pace of growth is clearly increasing -
qoq loan growth increased to 7% qoq in 3QFY12 from 6% qoq in 2QFY12 and 4% qoq in
1QFY12. Disbursements increased by 35% yoy. State sector was responsible for 52% of
loan book accretion; generation projects have driven 83% of incremental loan growth.
Lending to ‘others’ (short term etc) has increased to Rs47 bn from Rs31 bn in 2QFY12;
management has highlighted that they are more comfortable in lending to SEBs that raise
tariff and follow most conditions decided at a state ministers conference; all incremental
short term loans have a guarantee from the State Government.
NIM declines moderately
PFC’s NIM (KS –calc) declined to 3.9% from 4% in 2QFY12 and 4.1% in 3QFY11. NIM
would increase marginally, if we adjust for the reversal of income for the NPL (Rs190 mn)
recognized during the quarter.
NPLs increase during the quarter
PFC’s gross NPLs increased to 0.5% from 0.2% qoq. A loan to AP-based power plant
slipped into the non-performing category during the quarter. The company made provision
of Rs390 mn (10% of total exposure of Rs3.9 bn). Notably, loan to an MP-based hydel
project will likely be classified as an NPL in case the power company is unable to raise equity
in FY2012; PFC has an funded exposure of Rs7 bn and non-fund based exposure of Rs4 bn
to this project.
Large MTM gains on forex account
Earnings were largely distorted by forex gains. Following the change in account policy, PFC
booked gains of Rs4.2 bn in the forex account reflecting the reversal of losses booked in
1HFY12 (Rs5.8 bn in 1HFY12). The foreign currency translation account had a debit balance
of Rs8.5 bn as on December 2011.
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