Stock Review: Power Finance Corp

With loan book growing a robust 27 per cent ( `92,100 crore) and stable net interest margins (NIMs) of 4.1 per cent, Power Finance Corporation reported a 26 per cent increase in net interest income to `953 crore for the December quarter. Further, net profit adjusted for forex exchange items grew about 28 per cent to `687 crore, helped by steady operating costs.

The outlook for the loan book remains bright as generation companies (more than 70 per cent of disbursement) rush to meet their five-year capacity addition targets. It is reflected in quadrupling of approvals (Rs 17,800 crore) in the December quarter. Further, unutilised sanctions stand at `1,70,000 crore, out of which proposals of 1,00,000 crore (about 1.1 times current loan book) have already been executed.

However, analysts are wary that NIMs may come under pressure in the medium term amid rising interest rates. Liabilities of about `20,000 crore are expected to be re-priced in the March 2011 quarter, which is significantly higher than the figure of `4,700 crore in the same period last year.

The company's plans to raise capital via forex loans (besides $240 million raised in the September quarter), issue infrastructure bonds (eligibility to raise `5,300 crore) and follow-on public offer (expected in the June 2011 quarter) combined with further increase in lending rates should help maintain NIMs to some extent.

The markets have reacted positively to the company's strong financial performance and the stock ended 2.9 per cent higher at `280.35 on Tuesday over its previous close. The valuation is reasonable at 1.8 times FY12 average estimated book value and the stock remains analysts' top pick among non-banking finance companies.

Though the company provides strong revenue visibility, analysts foresee margin risks