IGI Logo

Weak quarter; muted loan growth and pressure on NIM

* Power Finance Corporation’s (PFC) 1QFY27 PAT grew ~5% YoY to INR47.5b (~5% beat). NII declined ~4% YoY to ~INR52.3b (~7% miss). Other operating income grew ~40% YoY to ~INR2.8b.

* PFC reported an exchange gain of INR752m (PQ: exchange loss of INR3.1b). Opex grew ~26% YoY to ~INR2.3b (~15% higher than MOFSLe). Cost-income ratio rose ~45bp QoQ to ~4.5%. PPoP grew ~11% YoY to INR53.6b (in line).

* Provision writebacks for the quarter stood at INR5.6b (vs. provision writebacks of INR13.8b in 4QFY26 and PY: INR6.8b). This translated into negative credit costs of -10bp during the quarter (PY: -12bp). The provision reversal in 1QFY27 was majorly on account of an upward revision in the internal rating of Tamil Nadu Power Generation Corporation Ltd. (TNPGCL).

* Reported yields stood at ~9.56% (FY26: 9.96%), while CoB stood at ~7.07% (FY26: 7.5%), resulting in spreads of ~2.5% (FY26: 2.45%) in 1QFY27. NIM (calc.) contracted ~22bp QoQ to ~3.7%.

* PFC indicated that the decline in lending yields during the quarter was in line with expectations, reflecting lower lending rates on both the existing and incremental loan portfolio amid the declining interest rate environment. Going forward, the company will continue to calibrate its lending rates in line with market conditions while balancing growth and spreads.

* We cut our FY27/FY28 EPS by ~2%/5%, primarily to reflect lower loan growth and margin contraction, partly offset by lower credit costs. We estimate a disbursement/advances/PAT CAGR of 3%/7%/2% over FY26- FY28, an RoA/RoE of 3.1%/17%, and a dividend yield of ~4.5% in FY28. We reiterate our BUY rating with an SoTP (Mar’28E)-based TP of INR500.

Valuation and view

* PFC reported an operationally weak quarter. While earnings exceeded expectations, the beat was primarily driven by provision writebacks, with underlying loan growth remaining subdued. Asset quality remained stable and resulted in benign credit costs. However, lending yields declined during the quarter amid heightened competitive intensity and PFC passing on the benefits of lower borrowing costs in both existing and incremental loans.

* PFC (standalone) trades at 1x FY27E P/BV and ~5x FY27 P/E, which we view as attractive. We, therefore, reiterate our BUY rating with an SoTP (Mar’28E)- based TP of INR500 (premised on a 1x target multiple for the PFC standalone business and INR146/sh for PFC’s stake in REC after a hold-co discount of 20%).

* Key risks:

1) weaker loan growth driven by weak disbursement

2) an increase in exposure to power projects without PPAs

3) compression in spreads and margins due to an aggressive competitive landscape

4) any slowdown in the offtake of renewable energy projects

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412