Stock Review: Power Finance Corporation (PFC)

In spite of the positive news of Power Finance Company (PFC) planning to raise funds and foray into the banking space, the company's stock fell 10 per cent (since November 9) as its September quarter results saw profits rising just 9.9 per cent on account of a dip in other income and a jump in tax outgo. In the long run though, the virtually non-existent non-performing assets, consistent financial performance driven by the low cost of funds, tight management of operating costs and low default rate set it apart from its peers in the sector. Not surprisingly, most analysts remain positive on the stock.

Key growth drivers

PFC and other entities like NTPC, Rural Electrification Corporation and Power Grid Corporation may come together to form a banking entity. It would soon appoint a consultant for its banking foray. In addition, the company is planning to float two subsidiaries, one for undertaking consortium lending and the other to focus on funding renewable energy projects. This will help it increase its focus in specific areas as well as expand its scale of operations. Analysts believe its consortium lending subsidiary will generate fee income of Rs 40 crore in FY11, thereby boosting its bottom line.

Strong first half

While PFC's net profit growth was muted in the September quarter, owing to a dip in other income (down 82 per cent to Rs 7.6 crore) and more than doubling of tax (to Rs 262 crore), it pulled down growth rates for the first half. Thus, while the net interest income was up 24 per cent in H1FY11, the net profit increased only 13 per cent.

The company has always been able to maintain superior asset quality (NPA of 0.01 per cent) due to the penalties imposed in case of a default, enabling it to mould the behaviour pattern of its borrowers. Its net interest margin remained stable at over 4 per cent. Being the nodal agency for financing power projects in the country, PFC's asset book grew 28 per cent in 1HFY11, faster than the growth in the infrastructure sector in the past 9-12 months.

Funding on track

PFC has several new avenues for funding its growth. The company aims to raise Rs 2,500 crore through ECB and tax-free infrastructure bonds by March 2011. A follow-on public offer of about Rs 6,300 crore, including sale of shares by the government, is also on the cards. The fund raising is part of its plan to raise Rs 27,700 crore this financial year to meet its annual loan disbursal target, of which it has already raised Rs 15,000 crore.

The road ahead

Strong demand from the power sector will continue to aid steady business growth for PFC. The disbursements growth is pegged at 25-26 per cent over the next two years, fuelled by a robust sanctions pipeline of Rs 1,60,000 crore. However, being able to keep up with the growing funding needs of the private sector will be one of its major challenges. PFC's new infrastructure finance company (IFC) status will help expand the resource base and improve the borrowing profile, while lowering costs. The company is expected to sustain high return ratios (return on asset of around 3 per cent and return on equity at 21 per cent). Most analysts are bullish on the stock and have a buy rating with price targets ranging between Rs 375 and Rs 415.