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We initiate coverage on Power Finance Corporation (PFC) with a BUY rating and
target price of Rs222/share (1.3x FY13E ABV). This is a play on incremental
improvements in the power sector that would lead to a valuation re-rating. PFC’s
lending profile is less risky compared to REC’s on account of the former’s lower
exposure to discoms. While partial restructuring at some SEBs remains a
possibility, a key risk emanates from its exposure to private power developers,
which currently comprises 9.8% of loans and where ‘bailout’ has low probability.
Despite factoring-in moderate loan growth, flat-to-declining spreads and higher
loan-loss provisions, PFC’s RoA and RoE is expected to remain healthy at 2.7%
and 18% respectively over FY12-14E. Initiate with a BUY rating. Slower than
expected pace of reforms leading to large-scale default and inability on part of
private power players to acquire fuel linkages remain the key risks.
Sanction pipeline will fructify into healthy loan growth. We expect strong
investments in generation space over the 12th five year plan to benefit PFC’s loan
growth. A strong sanctions pipeline of Rs1.82tn with Rs864bn from projects where
disbursements have commenced and documentation is complete will spur
disbursements and drive loan book growth of 19% CAGR over FY12-14E.
Spreads to stabilise at current levels as borrowing costs decline. On a YoY
basis, spreads compressed 58bps to 2.15% in Q3FY12 as incremental borrowing
costs remain high at ~9%. We expect spreads to recover to 2.5% by FY14E as
declining interest rate environment lowers borrowing cost and cushions the impact
of declining yields and ECB funding increases.
Asset quality concerns more on private sector exposure. As recommended by
VK Shunglu committee report, we believe that SEB restructuring would involve a
hair-cut only on the interest rate. As such, we compress yields by ~30bps over
FY12-14E. Also, we shall remain watchful of the private sector exposure, as
delinquencies here could result in substantial downside risk.
Risk-reward attractive; BUY for re-rating. The stock has underperformed the Nifty
and Bankex by 22% and 18% YoY and is 52% below its lifetime high. However,
recent government actions and tariff hikes highlight the fact that improvements will
likely follow. The stock should hence re-rate. We initiate coverage with a Buy rating
and a target price of Rs222/share (1.3x FY13E ABV).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We initiate coverage on Power Finance Corporation (PFC) with a BUY rating and
target price of Rs222/share (1.3x FY13E ABV). This is a play on incremental
improvements in the power sector that would lead to a valuation re-rating. PFC’s
lending profile is less risky compared to REC’s on account of the former’s lower
exposure to discoms. While partial restructuring at some SEBs remains a
possibility, a key risk emanates from its exposure to private power developers,
which currently comprises 9.8% of loans and where ‘bailout’ has low probability.
Despite factoring-in moderate loan growth, flat-to-declining spreads and higher
loan-loss provisions, PFC’s RoA and RoE is expected to remain healthy at 2.7%
and 18% respectively over FY12-14E. Initiate with a BUY rating. Slower than
expected pace of reforms leading to large-scale default and inability on part of
private power players to acquire fuel linkages remain the key risks.
Sanction pipeline will fructify into healthy loan growth. We expect strong
investments in generation space over the 12th five year plan to benefit PFC’s loan
growth. A strong sanctions pipeline of Rs1.82tn with Rs864bn from projects where
disbursements have commenced and documentation is complete will spur
disbursements and drive loan book growth of 19% CAGR over FY12-14E.
Spreads to stabilise at current levels as borrowing costs decline. On a YoY
basis, spreads compressed 58bps to 2.15% in Q3FY12 as incremental borrowing
costs remain high at ~9%. We expect spreads to recover to 2.5% by FY14E as
declining interest rate environment lowers borrowing cost and cushions the impact
of declining yields and ECB funding increases.
Asset quality concerns more on private sector exposure. As recommended by
VK Shunglu committee report, we believe that SEB restructuring would involve a
hair-cut only on the interest rate. As such, we compress yields by ~30bps over
FY12-14E. Also, we shall remain watchful of the private sector exposure, as
delinquencies here could result in substantial downside risk.
Risk-reward attractive; BUY for re-rating. The stock has underperformed the Nifty
and Bankex by 22% and 18% YoY and is 52% below its lifetime high. However,
recent government actions and tariff hikes highlight the fact that improvements will
likely follow. The stock should hence re-rate. We initiate coverage with a Buy rating
and a target price of Rs222/share (1.3x FY13E ABV).
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