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India Equity Research Reports, IPO and Stock News
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Power Finance Corporation (PFC) and Rural Electrification Corporation (REC)
have underperformed the NIFTY by 22% and 12% YoY respectively. However,
fears that had sent valuations crashing to 0.8x (for PFC) and 0.9x (for REC) 12-
month forward ABV still persist. Tariff hikes precipitated by financiers’
aggression and positive steps taken inter alia by APTEL and the PMO signify
remedial processes are underway to resolve the crisis. In our view, given that the
various stakeholders (government, CIL, APTEL, lenders, etc.) have much to lose
by allowing PFC and REC to fail, it is unlikely that their exposure to SEBs will
deteriorate into NPAs. Note that in case of a net worth impairment in either PFC
or REC: i) the government will anyhow have to recapitalise them because they are
state-owned lenders, and ii) failing to recapitalise will undermine the
government’s creditworthiness. Exposure to private sector projects may not
receive the same favours though. However, both PFC and REC have low private
sector exposure, which restricts asset risks. We therefore expect both PFC and
REC to trade at ~1.3x FY13E ABV (a discount to its 5-year average ABV multiple
of ~1.6x) with RoAs of 2.7 / 3.1% and RoEs of 18 / 21% respectively. We initiate
coverage on PFC (BUY) and REC (ADD) and prefer PFC for its lower risk profile.
Asset risks only in pockets, not across exposures. We believe PFC and REC’s
asset risks lie predominantly in their IPP exposures, concentrated in the underconstruction
generation projects. Most of these IPP projects are currently facing
delays due to lack of environmental clearance, FSAs and PPAs. One could foresee
restructuring/slippage in these projects. While risk of SEB default is quite low, the
possibility of restructuring loans to them exists; hence we also differentiate between
PFC and REC based on their SEB exposures. Of the exposure to SEBs, PFC has
~85% of it to states with unbundled SEBs and 49% to states with the top-9 lossmaking
SEBs. Its asset book is relatively less risky than that of REC where the
corresponding numbers are 71% and 60%.
Outstanding sanctions will help sustain business/earnings momentum.
Outstanding sanctions will lead to a healthy disbursement momentum of 18-20%
YoY, leading to a loan CAGR of 19% over FY12-FY14E for PFC and 18% for REC.
This coupled with average spreads of 2.4% and 3.3% for PFC and REC
respectively, is likely to result in healthy RoAs of 2.7% / 3.1% and an earnings
CAGR of 20% / 18% for PFC / REC respectively over FY12-14E.
As reforms take shape, multiples will approach ~1.3x FY13E ABV. PFC and
REC stock prices have corrected from peak valuations of 2.6x and 2.8x 1-year
forward P/ABV on persistent negative newsflow from the power sector. Current
valuations of 1.0x / 1.2x respectively seem to have factored-in the recurring bad
news. Incrementally, an overhang of tardy reform will keep trading multiples below
long-term averages. However, given their profitability profiles, we estimate 12-
month fair value multiples of ~1.3x FY13E ABV (a discount to 5-year average
P/ABV of ~1.6x) for both. Initiate coverage on PFC (BUY) and REC (ADD).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Power Finance Corporation (PFC) and Rural Electrification Corporation (REC)
have underperformed the NIFTY by 22% and 12% YoY respectively. However,
fears that had sent valuations crashing to 0.8x (for PFC) and 0.9x (for REC) 12-
month forward ABV still persist. Tariff hikes precipitated by financiers’
aggression and positive steps taken inter alia by APTEL and the PMO signify
remedial processes are underway to resolve the crisis. In our view, given that the
various stakeholders (government, CIL, APTEL, lenders, etc.) have much to lose
by allowing PFC and REC to fail, it is unlikely that their exposure to SEBs will
deteriorate into NPAs. Note that in case of a net worth impairment in either PFC
or REC: i) the government will anyhow have to recapitalise them because they are
state-owned lenders, and ii) failing to recapitalise will undermine the
government’s creditworthiness. Exposure to private sector projects may not
receive the same favours though. However, both PFC and REC have low private
sector exposure, which restricts asset risks. We therefore expect both PFC and
REC to trade at ~1.3x FY13E ABV (a discount to its 5-year average ABV multiple
of ~1.6x) with RoAs of 2.7 / 3.1% and RoEs of 18 / 21% respectively. We initiate
coverage on PFC (BUY) and REC (ADD) and prefer PFC for its lower risk profile.
Asset risks only in pockets, not across exposures. We believe PFC and REC’s
asset risks lie predominantly in their IPP exposures, concentrated in the underconstruction
generation projects. Most of these IPP projects are currently facing
delays due to lack of environmental clearance, FSAs and PPAs. One could foresee
restructuring/slippage in these projects. While risk of SEB default is quite low, the
possibility of restructuring loans to them exists; hence we also differentiate between
PFC and REC based on their SEB exposures. Of the exposure to SEBs, PFC has
~85% of it to states with unbundled SEBs and 49% to states with the top-9 lossmaking
SEBs. Its asset book is relatively less risky than that of REC where the
corresponding numbers are 71% and 60%.
Outstanding sanctions will help sustain business/earnings momentum.
Outstanding sanctions will lead to a healthy disbursement momentum of 18-20%
YoY, leading to a loan CAGR of 19% over FY12-FY14E for PFC and 18% for REC.
This coupled with average spreads of 2.4% and 3.3% for PFC and REC
respectively, is likely to result in healthy RoAs of 2.7% / 3.1% and an earnings
CAGR of 20% / 18% for PFC / REC respectively over FY12-14E.
As reforms take shape, multiples will approach ~1.3x FY13E ABV. PFC and
REC stock prices have corrected from peak valuations of 2.6x and 2.8x 1-year
forward P/ABV on persistent negative newsflow from the power sector. Current
valuations of 1.0x / 1.2x respectively seem to have factored-in the recurring bad
news. Incrementally, an overhang of tardy reform will keep trading multiples below
long-term averages. However, given their profitability profiles, we estimate 12-
month fair value multiples of ~1.3x FY13E ABV (a discount to 5-year average
P/ABV of ~1.6x) for both. Initiate coverage on PFC (BUY) and REC (ADD).
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