PFC delivered subdued 4QFY17 results due to re-alignment with RBI policy on Asset Classification and Asset Quality. The policy led to Rs. 34.3bn additional provision and Rs. 5.3bn of Income Reversal. The Net Interest Income (NII) was impacted by combination of interest reversal from the realignment + incremental NPA. We expect Rs. 72bn (out of Rs. 360bn) of Restructured Assets and Rs. 93.2bn (out of Rs. 233bn) of NPAs to be reversed back to standard in FY18 once those plants gets commissioned. It is trading at 8.5/7.5/7.1 years of growth under bear/base/bull case scenarios (Exhibit 6). Considering 70%/30% probability of max/min years of growth in each scenario, we obtain Sep’18 PT of Rs. 185/share at 1.1x P/B (vs. earlier Mar’18 TP of Rs. 199/share) and maintain LONG with an ATR of 36.7%.
PAT took hit due to Interest Reversal and additional provisioning:
NII stood at Rs. 15.4bn (-40.0%/-45.6% yoy/qoq). The lower growth in advances and the adoption of RBI policy led to Interest Reversal of Rs. 5.3bn and Calculated NIM at 2.6%. Provision increased substantially to Rs. 45bn due to Rs. 593bn of Assets getting impacted because of RBI policy. Standard Assets worth Rs. 360bn and Rs. 175bn slipped to Restructured and NPA category respectively. The provisioning was raised to 4.25% and 10% respectively instead of 0.35% earlier. Restructured Assets worth Rs. 58bn slipped to NPA, provision is now calculated at 10% instead of 4.25% earlier. Due to this, additional provision of Rs. 34bn was provided. This lead to PAT dropping to -Rs. 34bn (-371.7%/-302% yoy/qoq).
Advances growth slowed down due to higher Repayments:
Net Advances stood at Rs. 2,402bn (+1.1%/+2.0% yoy/qoq). Disbursements during the quarter were Rs. 296bn (+59.7%/122.5% yoy/qoq) whereas repayments were at Rs. 249bn (149%/108% yoy/qoq). Sanctions stood at Rs. 274bn (-31.9%/-14.4% yoy/qoq). Disbursements and Sanctions in Generation/ Transmission/ Distribution/ R-ARDRP (A)/ R-ARDRP (B)/ Others grew by -7.7%/49.8%/-26.9%/145.5%/41.4%/184.6% yoy and -20.1%/142.7%/-56.5%/-/-/-65.6% yoy respectively. We have built in 14%/14% growth in advances for FY18E/FY19E.
Asset Quality deteriorated but will improve going ahead once the plants gets commissioned:
GNPA/NNPA stood at Rs. 307bn/253.5bn (308%/318% yoy). GNPA/NNPA ratios stood at 12.5%/10.6% (929bps/796bps yoy). If PFC wouldn’t have adopted RBI policy, GNPA/NNPA ratios would have been 3.0%/1.7%. Out of Rs. 360bn of loans slipping to Restructured from Standard, we are reversing back Rs. 72bn/Rs. 144bn/Rs. 144bn in FY18E/FY19E/FY20E whereas of Rs. 233bn that slipped in NPA we are reversing Rs. 93bn/Rs. 93bn/Rs. 46.6bn in FY18E/FY19E/FY20E.
Valuations are close to median levels but we are positive on reducing market risk in incremental lending:
PFC is trading at 1.2x/0.9x FY18E/FY19E adj. P/B (adjusted for Private Sector NPA & Restructured Assets) with a FY18E/FY19E Adjusted RoE of 16.8%/14.7%. Key risks to our view are plants commissioning getting delayed, diminishing spread and low power sector capex.
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