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Healthy quarter; disbursements to accelerate further in 2H

Asset quality improves due to stressed asset resolution; NIM flat QoQ

* Power Finance Corporation (PFC)’s 2QFY25 PAT grew ~14% YoY to INR43.7b. Its 1HFY25 PAT grew 18% YoY to INR80.9b and we expect the 2HFY25 PAT to increase ~14% YoY.

* NII in 2QFY25 grew ~18% YoY to ~INR44.1b. Other income grew ~23% YoY to~INR14.7b, which included dividend income of INR12.5b (PY: INR10.8b).

* Opex rose ~106% YoY to ~INR2.4b, mainly driven by CSR expense of ~INR1.3b. PPoP grew ~14% YoY to INR53.3b.

* Yields (calc.) and CoB (calc.) declined ~8bp and ~9bp QoQ to ~10.1% and ~7.3%, respectively, resulting in spreads remaining stable QoQ at ~2.7%. Reported NIM was broadly stable QoQ at ~3.57%.

* GS3 improved ~70bp QoQ to ~2.7% and NS3 improved ~15bp QoQ to ~0.7%. This was driven primarily by the resolution of Lanco Amarkantak (PFC’s outstanding at ~INR23.8b), which resulted in a provision reversal of ~INR2b. Total provision write-backs in the P&L stood at INR1.2b. This translated into annualized credit costs of -10bp (PY: -9bp and PQ: 5bp)

* 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 of these stressed exposures to be resolved in the current financial year itself. Provisions carried against each of the stressed assets will be sufficient to take care of resolutions, and there will be some write-backs as well.

* We estimate a CAGR of 16%/14%/13% in disbursement/advances/PAT over FY24- FY27, RoA/RoE of 2.9%/18.5% and a dividend yield of ~4% in FY27E.

Key highlights from the management commentary

* PFC’s sanctions in 1HFY25 stood at INR1.6t, and it has a healthy pipeline of sanctions going forward as well.

* PFC has done a detailed due diligence on the Shapoorji Pallonji (SP) Group, but the company’s Board does not want to take that high an exposure. Finally, PFC has decided not to go ahead with the sanctioning of the loans to the SP Group.

* Disbursements were slightly slower in 1HFY25 as PFC began implementing the transformation strategy recommended by BCG from Apr’24. The company is progressing well on the transformation strategy, and management expects that its disbursement trajectory will be back on track from 3QFY25. PFC guided a loan growth of ~14%, similar to last year.

Valuation and view

* PFC (standalone) trades at 1x FY26E P/BV and 5x FY26 P/E, and we believe that the risk-reward is attractive considering good 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 INR560 (based on 1.2x target multiple for the PFC standalone business and INR211/ 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.

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