Buy Power Finance Corporation Ltd For Target Rs.475 by Motilal Oswal Financial Services Ltd
Weak loan growth due to lower disbursements; earnings in line
Asset quality broadly stable; reported NIMs rose ~8bp QoQ
* Power Finance Corporation (PFC)’s 3QFY25 PAT grew ~23% YoY to INR41.5b (in line). NII grew ~13% YoY to ~INR46.9b (in line). Other income grew ~2% YoY to~INR6b, which included dividend income of INR5.9b (PY: INR5b).
* Opex rose ~67% YoY to ~INR1.8b (~28% higher than MOFSLe), mainly driven by CSR expense of ~INR650m. The cost-income ratio stood at ~3.9% (PQ: 5.3% and PY: ~2.6%).
* Reported yields and CoB declined ~4bp and ~3bp QoQ to ~10.07% and ~7.47%, respectively, resulting in flat spreads QoQ at ~2.6%. Reported NIMs rose ~8bp QoQ to ~3.65%.
* GS3 improved ~3bp QoQ to ~2.68% and NS3 was largely stable QoQ at ~0.7%. PCR on Stage 3 remained healthy at ~73%. Provisions stood at INR745m, which translated into annualized credit costs of 1bp (PY: 6bp and PQ: -3bp).
* PFC management shared that its disbursements typically accelerate in the last quarter and reiterated its guidance of achieving loan growth similar to that in the previous year.
* Two projects with a total exposure of ~INR16.6b (Shiga Energy with an outstanding of INR5.2b and TRN Energy with an outstanding of INR11.4b) are in advanced stages of resolution. The company shared that it expects both these stressed exposures to be resolved in 4QFY25. It expects more than ~100% recovery on the Shiga Energy exposure.
* We estimate a CAGR of 18%/13%/12% in disbursement/advances/PAT over FY24- FY27, RoA/RoE of 3%/18% and a dividend yield of ~4.9% in FY27E.
Key highlights from the management commentary
* The forex market has been volatile since Jan'25, particularly with respect to USD/INR exchange rate movement. The company shared that for every INR1 depreciation, there will be a loss of INR450m in the P&L in 4QFY25. If the same depreciation trends continue, there can be some impact on the profitability in 4QFY25. However, PFC expects provision write-backs from stressed asset resolution, which will offset any currency translation losses.
* The company is not seeing any slowdown in renewable energy and it has sanctioned INR900b during 9MFY25 with ~50% of that in 3QFY25. PFC has disbursed ~INR60b toward RE projects in 3QFY25 and ~INR160b in 9MFY25.
Valuation and view
* PFC (standalone) trades at 0.8x FY27E P/BV and 4x FY27 P/E, and we believe that the risk-reward is attractive considering decent visibility on loan growth, earnings growth, stressed asset resolutions, and healthy return ratios.
* We reiterate our BUY rating with an SoTP (Sep’26E)-based TP of INR475 (based on 1x target multiple for the PFC standalone business and INR184/ share for PFC’s stake in REC after a hold-co discount of 20%).
* Key risks: 1) rise in exposure to private infrastructure projects as these loans fall outside PFC’s core expertise of lending to power projects; 2) increase in exposure to power projects without PPAs, 3) compression in spreads and margins due to aggressive competitive landscape, and 4) a slowdown in the offtake of renewable energy projects, driven by weak power demand.
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