31

Company Background

Power Finance Corporation Ltd. (PFC), set up in the year 1986 is a Schedule-A Navratna CPSE (Central Public Sector Enterprises). It is a leading power sector public financial institution and is the largest infrastructure finance company in the country based on net worth. A non-banking financial company, PFC is the 7th highest profit making PSU as per DPE Survey (March, 2017). It is dedicated to financing and investment into the 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 modernization of power projects.

Investment Rationale

l For the period of FY12-17, its topline grew at a CAGR of ~16% but its bottomline declined a bit mainly due to realignment with RBI Norms in which the loan assets got downgraded to restructure and NPAs. In Q2FY18 PFC’s standalone net sales grew by 0.59% to `6,897 crore, its operating profit was higher by ~4% to `6,925 crore and its PAT increased by 0.70% to
`1,887 crore, YoY basis. PFC has been consistently paying  Dividend since many years.

l The interest income of the company was `6,984 crore in the Q2FY18, slightly up from `6,968 crore year ago. The company has made a provision of `1,089.86 crore for nonperforming assets (NPAs or bad loans) in the Q2FY18, which is higher than `313.36 crore year ago. The company’s gross NPAs as on 30 September 2017 stood at `21,504.44 crore, down from `30,718.61 crore on 31 March 2017.

l Its loan book as on FY17 includes sanction of  `1,00,603 crore with disbursement amount of `62,798 crore. Of total loans ~72% of advances belong to state power utilities, 9% to central power utilities, 14% to private power utilities and 5% to joint sector power utilities. Its loan assets increased by 3% to `2,45,525 crore from `2,38,920 crore.

l Its capital adequacy ratio is maintained comfortably at 19.28%, with tier I capital of 16.20% against the RBI requirement of 15% and 10% tier I capital respectively.

l GoI is taking several initiatives to put power sector on revival path as in adding significant capacity and improving Coal scenario. Some of the major initiatives are 24X7 Power for All (PFA) by 2019, introduction of “Deep”, UDAY (Ujwal Discom Assurance Yojana), SHAKTI, etc. UDAY is a challenge for PFC, envisaging huge prepayments by DISCOMs, which means huge loss of assets / income to PFC but it will have a positive impact on overall power sector improving asset quality of PFC in the long term.

l PFC offers consultancy services in various areas of power sector through its wholly owned subsidiary, PFC Consulting Ltd. (PFCCL). It has undertaken 104 assignments so far to 57 clients spread across 23 States/UTs. Its total income and net profit grew by 64% and 50% respectively for FY16-17. PFCCL has entered into a MoU on December 27 with Tata Power Delhi Distribution Ltd. for jointly exploring opportunities in electricity distribution sector in the country.

Recommendation – PFC raised funds through green bond issue to promote renewable energy. Government’s exploration of forming a special purpose vehicle to ensure the stranded power units are up & running and interests of all stakeholders are taken care of.

All these initiatives are likely to turnaround power sector and benefit PFC. At the CMP of `121, the stock trades at ~5 times FY19 EPS of `24. Hence, we recommend a BUY on the stock with a Target Price of `168 with an upside potential of ~38% from the current level with an investment horizon of 9-12 months.