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Play on asset quality downcycle

Healthy topline; elevated opex marred by exchange losses  

Power Finance Corporation’s (POWF) Q3 PAT at INR 33.8bn was in-line (INR 34.3bn estimated), on healthy NII but QoQ growth pared 12% on lower dividend income, exchange losses and optically higher provisions (due to write-backs/reversals in base quarter). NIMs at 3.4% stood tad  higher (5bps QoQ), led by marginal uptick in yields with transmission of high funding costs to borrowers. Loans were optically lower due to high base effect, yet POWF witnessed healthy 16% YoY traction led by non-power, renewables and distribution segments. Management is upbeat on renewable funding opportunity, largely led by recent PM Suryodaya Yojana for rooftop solar financing, with subsidiary as the nodal agency.

Optically soft growth due to high base; guidance of 15% intact

POWF recorded a growth of 1.7% QoQ/16.2% YoY, largely led by renewable energy loans (up 4% QoQ/36.9% YoY), distribution loans (up 1.6% QoQ/26%YoY) and non-power loans (Infra/logistics/e-mobility; up 28.5% QoQ/255% YoY). Traditional transmission and generation loans surged 14%/7% YoY. Non-power share grew 49bps QoQ to 39.8%, and generation share declined 41bps QoQ to 50.6%. POWF expects growth in renewables to be led by equipment manufacturers of solar, hydro projects, continued distribution traction. And non-power growth may be accelerated by metro, port and infra projects underscoring robust business visibility. We expect a 15% loan CAGR in FY24E-26E.  

Asset quality improvement continues; resolutions underway

Asset quality improved, with six-year low Stage 3 assets of 3.52% from 3.67% in Q2FY24 (estimate: 3.6%). ECL provision rose 161bps QoQ at 74.4%. Currently, 21 stressed projects worth INR 160bn are in Stage III, of which 13 (worth INR 139bn) are being resolved under NCLT and the remaining eight (worth INR 22bn) outside NCLT. While DANS Energy (INR 4bn) was resolved in Q3, a hydro project may be resolved in Q4. Provision of LANCO project taken in the book was 76%.Thus, we pare GNPA estimates to 3.0-2.8% for FY25E/26E and expect credit cost estimates below average 20bps with sizeable write-backs/recoveries on the horizon (expect 10%-20%).

Valuations: Reiterate BUY, with higher TP of INR 569

We raise FY24E-26E estimates and core book multiple to 1.7x (earlier 0.9x) as POWF has steady growth visibility, stable margins and continued asset resolutions. Despite the robust rally, we still foresee 21% upside from current levels as POWF rides the asset quality downcycle with government impetus-led growth traction. We reiterate BUY with raised SoTP-TP of INR 569 from INR 343, on 1.7x PABV.