Power Finance Corporation (PFC) is a leading power sector public financial institution and a non-banking financial company providing fund and non-fund based support for the development of the Indian power sector. It is a nodal agency to channel investments into the power sector.
At present, state, Central and local municipal power sector utilities, power departments, private and joint power sector utilities and power equipment manufacturers are PFC’s clients.
The object of the issue is to augment the capital base to meet future capital requirement arising from PFC’s growth in loan and investment portfolio due to the thrust given on the development of the power sector.
Strengths
*Investment in the power sector is going to grow at a fast rate.
*Established relationships with and support from government and relevant authorities and departments.
*The gross non-performing assets (NPAs) at Rs 89.67 crore end September 2006 form 0.23% of total loan assets of the company. Net NPA ratio stood at just 0.16%.
Weakness
* The power sector is politically sensitive and the regulatory framework is still evolving, which can increase chances of defaults.
*In future, PFC will have to borrow in an increasingly competitive environment, resulting in higher cost of funds.
*In the current rising interest-rate scenario, PFC’s profitability is under pressure. In the first half ended September 2006, the interest income earned grew 10.9% to Rs 1733 crore over the first half ended September 2005. But interest expenses rose 23.3% to Rs 1094 crore.
*The financial track record is lackluster. Net interest income dropped from Rs 1400 crore in FY 2004 to Rs 1156 crore in FY 2006, and further by 6% to Rs 639 crore in the half-year ended September 2006. Profit before tax (PAT) before extraordinary (EO) items has also fluctuated between Rs 775 to Rs 925 crore over the last four years. In the latest half, it’s down 15% to Rs 412 crore.
Valuation
The first-half annualized EPS will be Rs 7 on post-IPO equity. At the price band of Rs 73-85, PE is 10.4-12.2. Pre-IPO book value is around Rs 70, giving P/BV ratio of 1 to 1.2. At this kind of valuations, one can get to choose from many PSU banks, some of whom are much better placed than PFC. The only listed sector-specific financial institution is Tourism Finance Corporation, which has seen its price spurt 50% in January 2007, ahead of PFC’s IPO, and yet trades at a PE of 10 and P/BV of 0.7.