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Buy Power Finance Corporation Ltd For Target Rs.210

Healthy performance across parameters

* PFC reported a healthy PAT of Rs23.3bn in Q3FY21, backed by consistency in margins (~363bps) and improving operating efficiency. PFC continued to benefit from lower cost of funds (~748bps) in Q3, thanks to sovereign rating and its diversified borrowing profile.

* Disbursements declined ~24.8% yoy (~52% qoq) to Rs138.5bn in Q3 due to a procedural delay in disbursements to discoms under the Aatmanirbhar plan. PFC sanctioned Rs590bn under the scheme as of Jan’21. AUM remained flat qoq at Rs3.65tn (+9.6% yoy).

* Asset quality improved as Gross NPA (Stage 3) further declined to ~5.9% from 7.2% last quarter due to one large asset resolution (Rs51bn) outside NCLT. Overall provisions remained elevated because of further enhancement of coverage to ~61% (~56% last quarter) as well as an additional Rs6bn provision on standard asset.

* We maintain our earnings estimates with a Buy rating and a TP of Rs210 (~1x P/Adjusted FY23 standalone book). We are factoring in dividend payout of ~25% for FY21-23E as per the revised policy framework; however, management is already in discussion with the government and any increase in dividend payout poses upside risk to our TP.

Disbursements slowed down due to procedural delays; pickup likely in next quarter: PFC has reported a decline in disbursements by ~24.8% yoy and ~52% qoq to Rs138.5bn, mainly attributed to a procedural delay in disbursements to discoms under the Aatmanirbhar plan. PFC sanctioned Rs590bn till Jan’21. Covid-19 has impacted demand for generation companies, which is expected to normalize in Q4.

Operating leverage kicking in; increase in hedging of foreign currency loans provides further comfort: The operating leverage during the quarter was fairly encouraging, with the opex-to-income ratio at ~0.3%. However, the same is majorly attributable to gains from foreign currency loans with consistent strengthening of rupee. Interestingly, the company has increased its overall hedging to ~71% of foreign currency loans (up to 5 years) against 58% earlier, which would avoid major volatility in earnings in coming years.

Asset quality trends continue to improve; gradual resolution of legacy portfolio expected: Gross NPA (Stage 3) further declined to ~5.9% in Q3 from 7.2% last quarter with one large asset resolution (Rs51bn) outside NCLT. The company expects two large asset resolutions in coming quarters, which would further improve the asset quality profile. Overall provisions remained elevated due to the enhanced coverage of ~61% (~56% earlier) as well as additional Rs6bn provision on standard asset.

Outlook and valuation: We are valuing PFC on SoTP basis; standalone PFC is valued by discounting profits in excess of RoE, and we add the value of 52.6% stake in REC at current market cap after a 30% holdco discount.

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