Power Finance Corporation Ltd: Powering gains
(BSE Code: 532810) (CMP: Rs.78.60) (FV: Rs.10)
Incorporated in 1986, New Delhi based Power Finance Corporation Ltd (PFC) is a financial institution (FI) that finances the power sector with an aim to integrate and develop power and its associated sectors. It is registered as a NonBanking Finance Company (NBFC) with the RBI and is a Schedule-A Navratna CPSE under the administrative control of the Ministry of Power (MoP).
PFC was incorporated with the objective to provide financial resources and encourage the flow of investments to the power and associated sectors, to work as a catalyst to bring about institutional improvements in streamlining the functions of its borrowers in financial, technical and managerial areas to ensure optimum utilization of available resources and to mobilize various resources from domestic and international sources at competitive rates. PFC is a dominant player in the NBFC space with a market share of ~20%. Its product portfolio comprises financial products and services like project term loans, equipment lease financing, discounting of bills, short-term loans, consultancy services, etc. for various power projects in Generation, Transmission and Distribution segments as well as for renovation and modernization of existing power projects.
PFC has been designated as the nodal agency by MoP for development of Ultra Mega
Power Projects (UMPPs), with a capacity of at least 3,500 MW each under the tariffbased competitive bidding route. MoP is the ‘facilitator’ for the development of these
UMPPs while Central Electricity Authority
(CEA) is the ‘Technical Partner’. Being large in size, these projects will meet the power needs of the country through transmission of power through regional and national grids.
For FY18, PFC reported 175% higher PAT of Rs.5855.22 crore on 2% lower sales of Rs.26414.47 crore with an EPS of Rs.22.18 and a dividend of 78% was paid. During Q1FY19, it reported 22% higher PAT of Rs.1373.26 crore on 4% higher sales of Rs.7052.05 crore with an EPS of Rs.5.2. Its capital adequacy ratio (CAR) stood at 20% while net NPA (non-performing assets) ratio stood at 7.6% v/s 10.6% in Q1FY18. The management is expected to maintain the dividend payout ratio of 30% going forward.
PFC’s loan asset book grew 14% to Rs.279000 crore as at FY18, of which the government sector accounts for ~82% while the private sector accounts for the balance
~18%. The management does not see any stress in its government sector loan book. Of the Rs.51000 crore private sector loan book, ~Rs.20000 crore (i.e. 7% of the overall loan book) is regular which means that ~89% of the loan book does not show any stress.
PFC recorded the strong highest ever disbursements of Rs.64400 crore in FY18 with 100% growth to Rs.13750 crore in refinancing and a 260% surge to Rs.9000 crore in disbursements to the renewable power sector. The management targets 10-15% loan growth for FY19.
PFC is focused on diversifying its borrowing profile. It has completed $800 million of a syndicated loan deal, $400 million of green bonds issuance and $460 million of FNCR (foreign currency non-repatriable) bond issuance. It also sealed a Rs.50000 million structured debt deal with LIC.
NPAs reduced to 7.4% in FY18 from 10.6% in FY17. Excluding the impact of the RBI circular issued in February 2018 which revised the NPA recognition and resolution framework, gross NPA and net NPA ratios have actually declined to
5.28% and 3.52% respectively in FY18. During the year, its exposure to state sector was 66%; central government 10%; joint sector 12%; and private sector 12%.
With an equity capital of Rs.2640 crore and reserves of Rs.37561.66 crore, PFC’s consolidated share book value works out to Rs.151. During FY16, PFC had issued a 1:1 bonus. Currently, the President of India (government) holds 65.1% of the equity capital, FIIs hold 11.8%, domestic FIs, Mutual Funds and Banks together hold 15.1% and PCBs hold 1.3%, which leaves 6.2% stake with the investing public. According to the Planning Commission estimates, PFC is expected to fund sizeable worth of power projects going forward. Apart from the high demand for credit, PFC’s access to Section 54EC bonds and tax-free bonds for low-cost funding may help it maintain its margins. Moreover, with a stable government at the Centre, infra bottlenecks are expected to be eliminated, which will be positive for its growth and asset quality. Thrust in rural electrification, renewable energy and decentralized distributed generation (DDG) will inter-alia enhance the penetration of electricity in the country, which will drive the demand further. With timely interventions by the government in addressing the nagging issues affecting the power industry, the outlook for the sector is quite optimistic with ample market opportunities available for financial products. Thus, the prospects for PFC are quite promising going forward.
The National Electricity Fund (an interest subsidy scheme) will be a potential source of income in future. Estimated aggregate capacity addition of 180 GW during the XII and XIII Five Year Plans put together (FY13-22) at an estimated investment of over Rs.34 lakh crore will continue to drive the prospects of the power sector in the country. The PFC share is recommended in view of the recent initiatives that have boosted hopes of accelerated reforms in the power sector. These include the financial restructuring package of SEBs (state electricity board), increased momentum in the signing of fuel supply agreements by Coal India and expectation of further tariff hikes by state power distribution companies (many state boards have hiked tariffs in the last 12-18 months). This should drive the investment cycle and aid loan growth for lenders such as PFC next year.
PFC plans to harness all resources to capture the optimal share of the funding business of the estimated debt requirement of the power sector. The stock is likely to notch an EPS of Rs.24 in FY19. At the CMP of Rs.78.60, the stock trades at a P/E of just 3x on FY19E EPS. A reasonable P/E of 5x will take its share price to Rs.120+ in the medium-term. The stock’s 52-week high/low is Rs.149.3/67.6.