Published on 18/05/2017 2:24:16 PM | Source: Equirus Securities Private Ltd
Update On Power Finance Corporation Ltd - Equirus Sec
PFC should emerge without much damage to its asset base and NIMs post UDAY bond refinancing. Government commitment to power sector should enable 10-15% loan growth with NIMs above 4%. While write-offs will continue over FY18E-FY20E, we see lower incremental market risk in the private sector portfolio. PFC is sweetly poised in terms of convergence of steady asset growth potential, reasonable spreads and improving asset quality. It is trading at 8.9/8.4/7.8 years of growth under bear/base/bull case scenarios (Refer to Exhibit 7). Considering 70%/30% probability of max/min years of growth in each scenario, we obtain Mar’18 PT of Rs. 199/share (vs. earlier Mar’17 TP of Rs. 165/share) and upgrade to LONG with an ATR of 30.1%.
PFC’s asset base and NIMs broadly in-tact even after a rise in State participation under UDAY:
Out of Rs. 2.7tn UDAY related restructuring, 67%/85% of the bonds amounting to Rs. 1.8tn/Rs. 2.3tn were issued by Mar’17. PFC had loan assets of Rs. 2.37tn in Dec’16 with gross spreads/NIM of 3.18%/4.74% and should not be lower than Rs. 2.3tn by Mar’17. Gross spreads/NIM were at 3.32%/4.85% in 9MFY17 and should be ~3.15%/4.70% for FY17E. Incrementally we expect PFC to manage 10-15% loan growth with 3.75%-4.25% NIMs with pick up in State and Central T&D and Renewables capex.
Conservatively factor write-offs between Rs. 61bn to Rs. 123bn in different scenarios:
Out of a total private sector lending of Rs. 394bn in Dec’16, PFC currently has recognized Net NPAs/Private Restructured Assets of Rs. 72.9bn/Rs. 209.8bn. We have considered incremental write-offs of Rs. 123bn (Rs. 53bn Net NPAs + Rs. 70bn further write-offs) in the bear case scenario and have moderated the write-offs by 25% in the base and bull scenarios. We have factored additional credit costs related to standard asset provisioning and future deterioration of asset quality.
Positive on sector capex and margin management, assign 70% probability to re-rating towards historical max years of growth:
Apps/portals related to fuel (TAMRA), generation (VidyutPravah/DEEP), transmission (TARANG/e-TRANS), distribution (UDAY/GARV/IPDS/URJA/URJA MITRA) and consumption (UJALA) will increase sector transparency and we expect the DISCOMs to operate more efficiently going ahead. Government’s thrust on providing 24*7 power and reducing T&D losses will support capex on T&D and working capital front. PFC and REC could benefit from a pro-India environment on the resource raising front. Amidst such a positive backdrop, we assign 70% probability for re-rating towards its historical max years of growth.
Valuations are close to median levels but we are positive on reducing market risk in incremental lending:
PFC is trading at 1.4x/1.2x FY17E/FY18E adjusted P/B with a FY17E/FY18E Adjusted RoE of 17.1%/13.4%, and -2.5% EPS CAGR over FY16-FY18E. Key risks to our view are low power sector capex, diminishing spreads and worse asset quality.
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