Investment Idea By IIFL - Power Finance Corporation

Power Finance Corporation (PFC) is a niche NBFC focused on lending to power generation, transmission and distribution segments. Revival in company’s disbursement growth from FY16 will drive a loan CAGR of 17.5% over FY15-17. Government’s ongoing efforts to resolve fuel supply and various other critical issues plaguing power sector should revive execution of stalled projects and attract new investments. This should lead to accelerated draw downs on existing sanctions as well as incremental build-up for PFC. It currently has a substantial sanction bank of Rs. 1.7tn which is equivalent to 82% of loan assets and 3.5x FY14 disbursements.

PFC’s NIM is expected to remain stable through FY17 at 4.8%. The tailwinds of increasing share of better-yielding private sector loans and decline in cost of funds (84% borrowings through bonds) should comfortably offset potential margin pressure from any revival in competition from banks and relatively higher amount of assets due for re-pricing in FY16.

Over the next two years, we expect some moderation in PFC’s credit costs from current levels (40bps in 9m FY15) despite the increase in regulatory provisioning requirements on standard assets (to 0.4% by FY18) and restructured assets (to 5% by FY18). The improvement in policy environment and financial health of SEBs should reduce incremental stress on asset quality in the form of lower pace of restructuring and slippages from existing book. However, shift to 120dpd reporting by FY17 would increase Gross NPL level by 30-40bps.

PFC is trading at an undemanding valuation of 0.9x FY17E P/ABV owing to perceived concerns around its asset quality and regulatory uncertainties. We believe that these risks are over emphasized by the street and the company would likely deliver healthy 15% CAGR in Adj. Book Value over FY15-17, despite complying with latest provisioning requirements. Average RoA and RoE delivery would continue to be impressive
at 3% and 21% respectively during the period. We initiate coverage on PFC with a ‘BUY’ recommendation.

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