Power Finance Corporation Ltd - Initiating Coverage - CRISIL Research

State-run Power Finance Corporation Ltd (PFC) is a leading non-banking financial company (NBFC) focused on lending to the Indian power sector. CRISIL Research expects the company to benefit from huge investments lined up in the sector. Despite the weak financials of state utilities and project execution challenges in the sector, PFC has had negligible non-performing assets (NPAs) in the past. Government policy action on these issues is a key monitorable. We assign PFC a fundamental grade of 4/5, indicating that its fundamentals are superior relative to other listed securities in India.

Leading financial institution in power sector financing

With a loan book of Rs 1,104 bn, PFC is the largest among financial institutions catering to the power sector; it accounts for ~20% of the incremental credit flow to the sector. CRISIL Research believes that PFC will maintain its leading position in power financing due to a) its strategic importance to the government's power sector development programme, b) advantage due to IFC status, c) long-standing expertise in the sector, and d) low-cost structure.

To benefit from Rs 10.3 tn investments in the power sector

CRISIL Research expects generation capacity addition of 87 GW over the next five years to drive Rs 10.3 tn investments in the power sector. PFC, as a result of its leading position in debt financing, will be a key beneficiary of these investments. PFC's loan book is expected to grow at 23% CAGR over FY11-16.

Asset quality maintained despite strong headwinds in power sector

The company's NPAs are negligible despite significant exposure to state utilities, which account for 65% of its loan book. However, lack of policy action and increasing accumulated losses of state utilities along with delays in project execution of funded projects could affect its asset quality and is a key monitorable. Given the importance of the power sector to the economy, we believe that reforms in the sector are inevitable.

Operating income to grow at CAGR of 28.5%

We expect the operating income to grow at 28.5% CAGR over FY11-13 on the back of strong loan book growth. Despite rising cost of funds, we expect the company to maintain its NIMs at 3.8-4.1% as ~40% of its loan assets will be re-priced in FY12. Capital adequacy will remain at 16.1% in FY13. We expect RoEs to be 19.0% in FY13.

Valuations – the current market price has strong upside

CRISIL Research has used the price to book (P/B) method to value PFC. We believe sectoral headwinds would weigh on the valuations till any significant policy action is undertaken. We assign a multiple of 1.5x FY13 adjusted book value to arrive at fair value of Rs 269 per share.

Source : Equity Bulls

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