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Earnings buoyed by resolutions and dividend income; disbursements gain traction

Power Finance Corporation’s (PFC) Q2FY23 earnings surpassed I-Sec estimates buoyed by provisioning release of Rs16bn on stress resolution and dividend income of Rs5.11bn. With resolution of South East UP Transmission (Rs22.6bn) and Jhabua Power (Rs7.6bn), stage-3 assets were down 90bps QoQ to 4.75%. Two more projects namely Ind Barath Energy (Utkal) (Rs13.7bn) and LANCO Amarkantak (Rs23.7bn) are in advanced stages of resolution and will keep stress pool under check. Provisioning release of Rs16bn on stress resolution was utilised to raise coverage on stage-1/2 assets. Drawing down from sanction pipeline, disbursements gained traction. Incremental sanctions under various power schemes revive hope on growth gathering pace gradually. Hedging proportion was improved to 68% (vs 44% YoY) to minimise the impact of rupee depreciation and it booked forex translation loss of Rs6.5bn. It declared interim dividend of Rs3 per share (35% payout of consolidated PAT in H1FY23). Maintain BUY with an unchanged target price of Rs191 (0.8x FY24 P/ABV).

With resolution in a couple of accounts, stage-3 assets were down 90bps QoQ to 4.75%; two more projects in advanced stages of resolution: Two projects were resolved in Q2FY23 including South East UP Transmission (Rs22.6bn) and Jhabua Power (Rs7.6bn). Consequently, gross stage-3 assets were down from Rs209bn (5.65%) to Rs129bn (4.75%)

Currently, 22 stressed projects are in stage-3. Of this, 12 (vs 14 QoQ) projects worth Rs123bn (vs Rs153.4bn QoQ) are being resolved through the NCLT including KSK Mahanadi (Rs33bn), Lanco Amarkantak (Rs23.8bn), Shri Maheshwar Hydel Project (Rs16.2bn) and Ind Bharat Utkal (Rs13.7bn). The remaining 10 (vs 9 QoQ) projects worth Rs55.9bn (Rs55.8bn) are being resolved outside the NCLT including Sinnar Thermal Power (Rs30bn) and TRN Energy (Rs11.4bn)

There are two projects in advanced stages of resolution: i) Ind Barath Energy (Utkal) with exposure of Rs13.7bn wherein resolution plan has been approved by the NCLT and is under implementation, ii) LANCO Amarkantak with exposure of Rs23.7bn where resolution is being pursued under the NCLT as bidding process has been completed but resolution plan is still under consideration of lenders. Incremental resolutions are likely to keep stress pool under check.

* Provisioning release on stress resolution was utilised to raise coverage on stage-1/2 assets: There was provisioning release of Rs16bn including Rs11.3bn on South East UP Transmission and Rs4.7bn on Jhabua Power. However, it was utilised to increase coverage on stage-1/2 assets by Rs16.9bn and provisions reversal benefit was restricted to Rs265mn. The additional provisioning has been majorly created on account of the 10th Integrated Rating published by the Ministry of Power for Discoms in August’22 and is in line with PFC’s ECL policy. It also improved coverage on stage-3 assets further by >250bps QoQ to 72%. It now carries provision of 76% on stress projects being resolved under the NCLT and 63% on other stressed projects. Detailed account-by-account analysis suggests credit cost of 50bps / 52bps for FY23E / FY24E, respectively. Higher haircut with delayed resolution may pose risk to our credit cost estimates.

* Draw-down from sanction pipeline supports disbursement traction; improved visibility for disbursement under various power schemes: Drawing down from robust sanction pipeline, disbursements gained traction growing 21% YoY and 270% QoQ (on a low base) to Rs171.5bn led by both generation as well as distribution segments. As a result, loan book was up 1.8% QoQ/1.3% YoY at Rs3.76trn.

On Jun 3, ’22, the Ministry of Power notified the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022. PFC has sanctioned Rs455.2bn and disbursed Rs66.1bn (vs Rs13.4bn QoQ) to discoms for clearance of dues under the LPS Rules. PFC has sanctioned loans in total 8 states namely Rajasthan, Andhra Pradesh, Telangana, Jammu & Kashmir, Manipur, Jharkhand, Chhattisgarh and Maharashtra. It has also sanctioned Rs174.3bn and disbursed Rs45bn so far under Revolving Bill Payment Facility (RBPF). Under RDSS (Revamped Distribution Sector Scheme), it has incrementally sanctioned projects to two new states (namely Maharashtra and Puducherry) expanding it to total 10 states now. PFC Group had signed a Memorandum of Loan agreement on Oct 18, ‘22 with SJVN Thermal Private to provide financing of Rs85.2bn for setting up a 2x660MW thermal power plant at Buxar (in Bihar). The debt requirement will be financed equally by PFC and REC.

PFC Group can now lend to infrastructure and logistics sector and to start with, lending up to 30% of net worth has been permitted by the Ministry of Power. The company is also exploring opportunities to provide financing for electromechanical components of projects in ‘other infra’ sector (such as metro’s, ports and airports). Hence, as disbursements pick up going forward, loan asset growth is envisaged to gather pace, gradually. We are building-in loan growth of 3%/ 6% for the company in FY23E / FY24E, respectively. Slower than anticipated demand pick up in project financing and liquidity schemes may result in correspondingly slow loan growth

* Yields supported by interest recognition on stress resolution; rise in funding cost pulls down NIMs: Interest income had benefit of interest recognition on stress resolution to the extent of >Rs3bn. Even after adjusting for this benefit, yield on advances for Q2FY23 further rose 6bps QoQ to 10.07%. Cost of funds also rose 23bps QoQ to 7.31%. As a result, spreads contracted by 17bps QoQ to 2.76% and margins moderated 13bps QoQ to 3.56%. Thus, netinterest income was up 9% YoY and 11% QoQ. Heightened competition from banks, coupled with moderate demand, and rise in funding cost will result in some margin pressure in coming quarters.

* CRAR sustained above 24%; announced interim dividend of Rs3 per share (Rs2.25 in Q1FY23): PFC has been focusing on building an adequate capital buffer. CRAR was steady at 24.29% with tier-I capital at 21.13% (20.95%/20.00%/19.07%/18.42%/17.56% in Q1FY23/Q4/Q3/Q2/Q1FY22) and tier-II capital at 3.16% (vs 3.38% QoQ). It announced interim dividend of Rs3 per share (over and above Rs2.25/share in Q1FY23), which is equal to ~35% payout on H1FY23 consolidated EPS. We believe PFC will continue with its policy of declaring dividend equivalent to 30% of earnings, or 5% of net worth, whichever is higher.

* Hedging proportion was improved to minimise the impact of rupee depreciation: Due to adverse foreign currency movement, it booked forex translation loss of Rs6.5bn. As of Q2FY23, ~95% of forex borrowings with residual maturity of up to 5 years have been hedged and out of this, 100% of US$ denominated borrowings have been hedged. Also, nearly 68% of total foreign currency portfolio has been hedged (vs 44% YoY).

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