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Company Background

Power Finance Corporation Ltd. (PFC) was incorporated in 1986 - under Schedule-A Navratna CPSE (Central Public Sector Enterprises) and is a leading Non-Banking Financial Corporation in the Country. It is a specialised public financial institution in power sector and is the largest infrastructure finance company in the country by net worth. It is incorporated to finance, facilitate, invest and promote India’s integrated development of the power and associated sectors. PFC’s product portfolio comprises of financial products and services mainly to power projects like project term loans, short term loans, equipment lease financing, discounting of bills and consultancy services. It has also initiated financing of projects based on renewable energy sources. It acts as vehicle for development in generation, transmission and distribution as well as for renovation and modernisation of power projects.

Investment Rationale

For the period of FY13-18, both its topline and bottomline grew at a CAGR of 9% and 6% respectively. In Q4FY19 PFC’s standalone income grew by 23% to Rs. 7,701 crore, its operating profit was higher by 48% to Rs. 7,896 crore and net profit has risen more than double to Rs. 2,118 crore, YoY basis, mainly due to higher revenues. PFC has been consistently paying Dividend since many years.

 PFC finances power sector projects and its main source of revenue is interest income on loans. For the whole year FY18-19 PFC’s standalone net profit grew by 59% to Rs. 6,953 crore and on consolidated basis posted profit of
Rs. 12,596 crore up by 44%, YoY basis.

 Despite the liquidity challenges in the market, PFC managed to deliver excellent business growth by leveraging its strong credit rating profile and long established reputation. As of March 2019, the company’s loan asset book crossed Rs. 3 trillion and grew at a rate of 13%.

 During the fourth quarter ended March, PFC had completed the acquisition of state-run REC Ltd. (formerly Rural Electrification Corporation Ltd.) by acquiring 52.63% share at a cost of about Rs. 14,500 crore. The acquisition would enable increased efficiencies in lending processes and policies across both the institutions and would create public value by offering better loan products to the power sector. REC has targeted to achieve Rs. 28,000 crore revenue from operations in current fiscal in view of excellent performance scenario.

 Considering the significant increase in size and profitability, PFC became the largest financial player in power sector. PFC will be the second-largest government-owned financial player in the country based on the current market capital after State Bank of India (SBI). Besides, PFC will be third-highest profit making financial player in India based on profit data of 2017-18 after IOCL and ONGC.

  In June 2019, PFC has raised USD 1 billion (around Rs. 6,940 crore) through issuance of bonds in the international market.

 In March quarter, GVK Ratle, where PFC had an exposure of Rs. 800 crore, has been upgraded as a Standard Asset from non performing asset (NPA) category. The company had lent Rs. 29,000 crore worth of its loan book to 29 stressed power projects of which 15 projects are in National Company Law Tribunal (NCLT) and the remaining they are trying to resolve outside NCLT.

 Recommendation – The convergence between PFC and REC would help the company reap benefits from a decentralised outreach and a professional project finance expertise. Further, the ensuing diversification of assets of the group, as well as portfolio risk would help in resolution of stressed power sector assets in a better and coordinated manner. All these initiatives are likely to turnaround power sector and benefit PFC. At the CMP of Rs. 135.85, the stock trades at 2.5 times FY21 EPS of Rs. 54. Hence, we recommend a BUY on the stock with a Target Price of Rs. 162 with an upside potential of 19% from the current level with an investment horizon of 9-12 months.

Power Finance Corporation Ltd.Industry       Finance Term                        Lending

No. of Shares (Crore)                     264.01

Face value (Rs. )                            10.00

Mkt. Cap (Rs. Crore)                      35865.75

Price (27/06/2019)                       135.85

Book Value (Rs. )                           152.27

P/BV                                                 0.89

BSE Code                                          532810

NSE Code                                         PFC

Bloomberg                                       POWF IN

Reuters                                             PWFC.BO

Avg. Monthly Volume                     92,35,380

52 W H/L (Rs.)      138.15 / 67.50

Shareholding Pattern                                         %

Indian  Promoters            59.05

Foreign  Promoters         0.00

DIIs        18.70

FPIs        16.63

Body Corporate                0.80

Non-Institutions               4.83

Total      100

(As on March 31, 2019)