Power Finance- Strong performance; accumulate ahead of FPO: Macquarie

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Power Finance
Strong performance; accumulate
ahead of FPO
Event
 Strong results: Power Finance (PFC) reported strong 2Q FY11 core
earnings with robust loan growth and margins. 2Q11 PAT was Rs7bn, up 10%
YoY and 4% below our estimates on lower forex gains and higher opex.
 Upgrading TP, we recommend buying ahead of FPO: We have
incorporated a 10% dilution in FY12 as a result of the follow on offering.
Accordingly, we are increasing our TP to Rs458 from Rs380. We advise
investors to buy the stock in the lead up to the FPO, which may come by end
FY11/early FY12.


Impact
 FPO, probable in end FY11/early FY12, could be a key trigger:
Management is waiting for government clearance on the issue post that it
expects to come to the market by 4Q11/1Q12. We believe this could be a key
trigger for the stock as this should increase the float significantly (presently
government shareholding is 90%). A useful pointer could be the performance
of Rural Electrification Corp, which is up 52% since its FPO in March 2010
compared to 39% for PFC for the same period. We have assumed a 10%
equity dilution at current prices in 1Q12 in our numbers.
 Valuations very attractive: Post equity raising, the stock would trade at a
very attractive 2.1x FY12E P/BV for a ~19% ROE with high earnings visibility.
Despite dilution we expect an EPS CAGR of 20% for FY10–13E. Fig 2 gives
comparative valuations of PFC, REC and IDFC.
 Robust 2Q11 performance: Operating performance was robust with net
interest income 3% ahead of our estimates.
NIMs for 1H11 are up 15bp at 4.13% over FY10 NIM of 3.98%. This
compares with our ~10–12bp NIM compression estimate for FY11 and we
believe it provides sufficient cushion for higher funding costs in 2H11.
Sanctions showed a strong pickup from 1Q11, growing 84% YoY (-26% in
1Q11). Disbursals were up 40% YoY and are up 63% YoY for 1H11
compared to our 40% estimate for FY11.
Earnings and target price revision
 We are increasing our NIM estimates for FY12 and FY13E. FY12E and
FY13E EPS goes down ~5% for FY12E and FY13E on incorporating 10%
equity dilution. We are increasing our TP by 20% driven by higher P/BV
multiple given improved NIMs and incorporating equity dilution.
Price catalyst
 12-month price target: Rs458.00 based on a Gordon Growth methodology.
 Catalyst: Pick up in loan growth in 2H11E, greater clarity on FPO timing.
Action and recommendation
 Our TP values the stock at 2.6x FY12 BVPS. Strong growth and earnings
visibility remain the key strengths. Maintain OP.