Power Finance Corporation- Increasing FY13F PAT by 16%; reiterate Buy Key beneficiary of a stronger SEB outlook:: Nomura Research

Action: Reiterate Buy; TP unchanged at INR240
We believe the recent financial restructuring plan (FRP) and the spate of
tariff hikes over the past few months have strongly reduced the overhang
on PFC's SEB exposure (71% of its Q1FY13 loan book). As per
management, some of the stressed Discoms have already started
showing improved timeliness in loan repayments. We had earlier
budgeted for restructuring of 8% of PFC's loans to the stressed Discoms,
which we don’t see necessary any longer, although we have factored in
marginal NIM impacts from extending shorter-term transition loans to
some of these Discoms over the next few years. Our earnings estimate for
FY13F and FY14F go up by 16% and 6%, respectively. We expect loan
book growth of 18% and 16% for FY13F and FY14F, respectively.
Expect strong spreads and stable asset quality to sustain ROA
PFC's spreads have improved by 50bps over past six months helped by
asset repricing and we expect it to come down by 15bps to 2.45% by
FY14F. We expect asset quality to hold over FY13-14F, although we are
factoring in incremental provisions on the existing NPLs.
Catalysts: Adoption of FRP by SEBs, tariff hike orders in UP and
other states and developments on the coal linkage front
Valuation
PFC trades at 1.1x our avg FY13-14F ABV and 6.4x our FY13F EPS. At
our TP of INR240, PFC would trade at 1.4x our avg FY13-14F ABV of
INR173 and 7.8x EPS of INR30.8, for FY13F ROA of 2.7% and 19% ROE

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