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Buy Power Finance Corporation Ltd For Target Rs.220

Healthy performance, asset quality improves

* PFC reported healthy trends in profitability, with PAT of Rs22.7bn (+33.8% yoy, -2.3% qoq), driven by improvement in margins (~381bps) and credit costs (~49bps vs. ~86bps last quarter). However, disbursements remained weak at Rs113.3bn (-45.4% yoy, -18.2% qoq), mainly due to weak demand across segments.

* Asset-quality trends were encouraging, as out of the total Stage-3 assets of Rs211.5bn for 26 projects, 16 projects worth Rs158.2bn are already admitted under the NCLT with ~69% provision coverage, while 10 projects worth Rs53.3bn with 54% coverage are being pursued outside the NCLT. Overall coverage improved to ~65% from ~63% last quarter.

* Yields are re-prized at lower rates from Apr’21 to improve competitiveness among lenders. Hedging of ~86% of forex loans (maturing up to 5 years) also provides comfort over volatile forex losses. Aatmanirbhar plans for SEB may support near-term disbursements; however, finding new growth avenues - amid weak thermal power additions - is a necessity.

* We continue to like the company based on improving asset-quality trends and an attractive risk-reward. Maintain Buy and roll forward to Sept’22E with a revised TP of Rs220 (Rs215 earlier), corresponding to ~1x P/Adj. Sept’23E book. We are increasing the dividend payout estimate to ~45% by FY24E, based on revised guidelines from the RBI.

Disbursement momentum remains weak; new avenues of growth necessary:

Disbursements during the quarter remained weak at Rs113.3bn (-45.4% yoy, -18.2% qoq), mainly due to weak demand across segments. Total AUM remained flat sequentially at Rs3.7tn on lower disbursements. In our opinion, in the absence of any major capex plans in the thermal power segment, the company needs to find new avenues of growth to maintain existing leverage.

Asset-quality trends continue to see improvement; gradual resolution of legacy portfolio expected:

On asset quality, PFC has witnessed an improvement in Gross Stage-3 assets to ~5.72% from ~7.5% last year, while Net Stage 3 has improved to 2% from 3.41% last year. Asset-quality trends remained encouraging, as out of the total Stage-3 assets of Rs211.5bn for 26 projects, 16 projects worth Rs158.2bn are already admitted under the NCLT with ~69% provision coverage, while 10 projects worth Rs53.3bn with 54% coverage are being pursued outside the NCLT. Overall coverage improved to ~65% from ~63% last quarter.

Outlook and valuation:

We are valuing PFC using sum-of-the-parts (SOTP) - 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 applying a 30% hold-co discount. We continue to like the company based on improving asset-quality trends and attractive risk-reward. We maintain our Buy rating and OW stance in EAP and roll forward to Sept’22E with a revised TP of Rs220, corresponding to ~1x P/Adj. Sept’23E book. We are increasing the dividend payout estimate to ~45% by FY24E, based on revised guidelines from the RBI.

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