Power Finance Corporation: Emerging from the woods - Motilal Oswal

Huge lending opportunity to drive growth despite headwinds

PFC is well placed to leverage the strong demand for financing in the power sector, with its leadership position and strong domain knowledge. Well matched asset-liability profile has been cushioning PFC against interest rate risks; however, rising competition and bulk borrowing rates are likely to impact spreads. We model PAT CAGR of 18% over FY11-13, supported by lean cost structure and minimal credit cost. Heightened concerns over SEB losses and expected slowdown in loan growth (due to environment clearance issues) have led to a sharp 45% correction in stock price from the peak. We believe current valuations are attractive at 1.2x FY13E BV. We initiate coverage with a Buy recommendation and a target price of Rs290 (1.6x FY13E BV), 37% upside.

Incremental lending opportunity of Rs8t+ over FY12-17: Recognizing its importance in the country's overall economic growth, the government has made high allocations towards the power sector in its 11th and 12th five-year plans. Under the 12th plan alone, power sector fund requirement will be Rs11t — Rs5t for gencos (~100GW to be added), Rs2.4t for transmission, and Rs3.7t for distribution. In FY12 (last year of 11th plan), ~20GW is likely to be added, leading to fund requirement of Rs1t. Thus, total fund requirement over FY12-17 is Rs12t. Assuming debt equity of 70:30, this translates into a massive opportunity of Rs8t+ for lending agencies. We expect PFC to clock 20% CAGR in loan disbursals over FY11-13 and consequently 23% CAGR in its loan book to Rs1.5t by FY13.

Niche power financiers are better placed to capitalize on this opportunity: Total bank credit to the power sector has grown at a CAGR of 38% over FY05-FY11 to Rs2.7t as against 22% for PFC (to Rs1t) and 24% for REC (to Rs800b). However, with some banks approaching the lending limit approved by their respective boards for the infrastructure segment, growth in bank loans to this segment would be in line or marginally above industry average. For niche NBFCs, grant of IFC status (enabling higher exposure to a single/group of borrowers) and better asset-liability profile will provide an edge.

PFC's higher exposure to generation segment a big positive: Though SEBs account for 65% of PFC's loan book, 85% of its loans are towards the generation segment. This is a big positive, as unlike the state distribution companies (Discoms), the state generation companies (Gencos) are largely cash positive.

Initiating coverage with a Buy rating and target price of Rs290: PFC is a long-term bet on India's expanding power sector investments. It offers a good combination of strong growth and value. Planned capital raising of ~Rs35b (overall capital raising of ~Rs47b; government stake sale of ~Rs11.6b) would support faster loan growth and provide the ability to take higher exposure to single/group borrowers. We model PAT CAGR of 18% over FY11-13 and expect the return ratios to remain strong, with RoA of ~2.7% and RoE of 16-17% (post dilution) for FY12-13. PFC trades at attractive valuations of 1.3x FY12E and 1.2x FY13E BV (post capital). We initiate coverage with a Buy rating and target price of Rs290 (1.6x FY13E BV), 37% upside.

Source : Equity Bulls

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