IGI Logo

Stable stage-3 assets, improved coverage, pre-payments weigh on growth

Power Finance Corp (PFC) has registered Q2FY22 PAT of Rs27.6bn (up 32% YoY and 21% QoQ). Earnings were buoyed by dividend income of Rs4.0bn and lower forex loss of Rs1.6bn vs Rs2.6bn QoQ while credit cost was flat at Rs4.56bn vs Rs4.60bn QoQ. Net interest income was up 5% YoY and flat QoQ due to cut in lending rates w.e.f. Apr’21. Stage-3 assets remained stable at Rs210.6bn (5.67% vs 5.72% QoQ) and a couple of projects are in advanced stages of resolution. Coverage ratio was shored up on both stage-3 as well as stage-1/2 assets. Loan book was flat QoQ and growth is likely to be led by focus on renewable energy and refinancing. FY22 onwards, PFC is announcing dividend on quarterly basis and announced interim dividend of Rs2.5/share in addition to Rs2.25/share in Q1. Maintain BUY with an unchanged TP of Rs 191.

* Stage-3 assets steady; coverage further improved: Stage-3 assets in Q2FY22 were stable at Rs210.6bn (5.72%) with stressed account of Rs0.76bn getting resolved during Q2. Out of 25 stressed projects, 16 projects worth Rs167bn are being resolved through NCLT (68% provisioning coverage) and the remaining 9 projects worth Rs44bn are being resolved outside NCLT (58% coverage). Strengthening the balance sheet, it has further created further provisioning on stage1/2 assets of Rs2.4bn and inched up provisioning coverage to 66% from 65% QoQ on stage-3 assets (Rs1.5bn). Thereby, credit cost came in at Rs4.56bn (<50bps) which was flat QoQ. During the quarter, resolution plan for 1,200 MW Essar Power Mahan loan of Rs13.45bn has been approved by NCLT and adequate provisioning has been made against these assets. Detailed account-by-account analysis suggests limited downside risk to stress accretion and that too will be more than offset by resolutions, which are currently in advanced stages. We have now built-in credit cost of 0.9%/0.5% for FY22E/FY23E, respectively. Higher haircut with delayed resolution may pose risk to our credit cost estimates.

* Cut in lending rates and gradual repricing lead to mild dip in margins and spread: Net interest income was up 5% YoY and flat QoQ due to mild decline in NIM. Decline in yields was expected due to interest rate cut offered to PFC borrowers w.e.f April 1st 2021. Credit yield fell 11bps QoQ and 42bp YoY to 10.28% while cost of funds fell 4bp QoQ and 22bp YoY to 7.39%. Margins, as a result, compressed 7bps QoQ and 6bps YoY to 3.63% - though the entire repricing of loan book is yet to reflect and will happen gradually. Heightened competition from banks, coupled with slow demand, will result in flat to lower margins in coming quarters.

* Loan book flat QoQ as well as YoY due to increased pre-payments: Loan book was almost flat QoQ/YoY at Rs3.7trn. Disbursements, after tepid Q1, were up 25% QoQ at Rs142bn primarily dominated by disbursements under Atmanirbhar discom scheme. Under the Atmanirbhar discom scheme, majority of disbursements of Rs481.84bn (Rs385bn till Jun’21) have been released as of Q2FY22-end. PFC is witnessing increased pre-payments by its borrowers due to availability of cheaper financing from banks and higher liquidity in the market, which is attributing to subdued loan growth. Moreover, slow capex growth in power sector is impacting PFC’s lending business. However, as the situation improves, the loan asset growth is expected to normalise. Further, as disbursements pick up in the second half of the year, going forward, loan asset growth is envisaged to pick up, gradually. PFC’s continued focus will be on T&D & renewable business. We are building-in loan growth of 4-10% for PFC over FY21- FY23E. Slower than anticipated pick up in project financing and liquidity scheme demand may settle loan growth below our estimates.

* CRAR sustains above 20%; sufficient buffer available for dividend payout: PFC has been focusing on building adequate capital buffer. CRAR increased by 60bps QoQ to 21.76% with tier-I capital of 18.42% (17.56% QoQ) and tier-II at 3.34%. The company announced second interim dividend of Rs2.50 per share taking the total interim dividend to Rs4.75 in H1FY22. In FY21, it declared cumulative dividend of Rs10 (30% payout). This year onwards, first time, it is announcing interim dividend on quarterly basis. Going forward, it will continue with its policy of declaring dividend equivalent to 30% of earnings, or 5% of net worth, whichever is higher.

To Read Complete Report & Disclaimer Click Here

or More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer