Stock Review: Power Finance Corporation (PFC)

 

RECENT developments suggest that the downtrend witnessed by Power Finance Corporation's stock (PFC) could change for the better, albeit in the medium term. From the peak level of 383 in October 2010, the stock has halved to `180.

Firstly, the company posted healthy results for the June quarter, which has somewhat eased asset quality concerns. Second is the recent decision of state governments to bring down commercial losses of state electricity boards (SEBs) via measures like annual tariff revisions, conversion of loans into bonds/equity, computerisation of accounts and so on. While the latter augurs well for players like PFC, it will take time for these steps to bear fruits— the markets will be keeping an eye on asset quality on this front.

Meanwhile, PFC's stock is valued attractively vis-a-vis peers like REC (15-25 per cent discount) so is its 5-year forward trading multiples (30-35 per cent discount). Factors like higher exposure to low-risk power generation business (85 per cent) compared to its peers (REC has 40 per cent exposure) places it better, given the concerns surrounding the power sector. Most of the analysts are bullish on the stock with average target price of `269.

MITIGATING ASSET QUALITY CONCERNS

For the quarter ending 30th June, PFC reported higher than the expected results on top-line front while the bottom line was largely in-line with the expectations. The growth in net interest income was driven by loan book growth of 22 per cent over the previous year. Notably, its fee, lease and other incomes fell by 46 per cent year-on-year to `35 crore, resulting in lower net profit growth than expected. However, excluding one-offs like forex gains and prior tax period, the net profit was up by 14 per cent year-on-year to `716 crore.

This was way-ahead of the expectations of 5-6 per cent of yearon-year bottom line growth.

Higher operating costs (up by 27 per cent year-on-year) and provisioning (up by 7 per cent year-on-year) also restricted the bottom-line growth of the company. Further, the higher cost of funds (up by 27 basis points sequentially) led to a contraction by 10 basis points in the net interest margin (NIMs) over the March 2011 quarter. Its capital adequacy ratio remained healthy at 18.9 per cent, up by 319 basis points, thanks to its recent follow-on public offer, and will provide fuel for the future growth. Interestingly, despite the burgeoning losses faced by its key clients – SEBs - that form close to 65 per cent of its loan portfolio, PFC managed to keep its net non-performing assets (NPAs) unchanged at 0.20 per cent on a sequential basis. If this trend sustains the pressure on the stocks will ease.

Meanwhile, analysts expect the company to post a 20-22 per cent annual growth in net profit for the next two financial years. This will be driven by a healthy loan book growth of close to 24 per cent as well as margin expansion of 15-20 basis points. The strong sanctions pipeline of six times its annual disbursements will drive loan growth for the company. While its credit costs could go up, access to low-cost funds through instruments like tax-free bonds and external commercial borrowings (ECBs) will support its margins. Also, favourable asset-liability management (ALMs) and recent fund raising will boost its margin this fiscal, believe analysts at Bank of America-Merrill Lynch.