Power Finance Corporation

Investors can consider accumulating the stock of Power Finance Corporation. It has been an underperformer in the recent rally, despite the company’s strong growth prospects. PFC has consistently managed strong loan disbursals and superior margins. A focus on secured lending (as the loans are secured by escrow accounts or assets), superior asset quality (Gross NPA is 0.02 per cent of the total advances) and the ability to source funds at low costs (given its sovereign credit rating) are key positives, at a time when financial stocks have been dogged by asset quality and margin concerns. At the current market price, the stock trades at a price-earnings multiple of 13; at 1.8 times its FY09 book value.

PFC is an NBFC (not under RBI supervision), which is a specialised financier of power sector projects. Its loan book grew by 25 per cent in 2008-09 aided by higher disbursements. Improved net interest margins (3.84 per cent) helped the company manage a net interest income growth of 25 per cent. However, notional forex losses led to a muted net profit growth of 12 per cent (the company has chosen not to take advantage of the relaxation in forex accounting norms). By March 2009, only 48.3 per cent of the loans sanctioned were disbursed, leaving a gap of about Rs 1,20,000 crore which is about 1.85 times PFC’s existing loan book. That lends high earnings visibility, as credit offtake in the power sector may continue to grow at a strong pace due to funding gap of Rs 10,31,600 crore in the current Five Year Plan (2007-2012). The cost of funds for PFC is lower than other NBFCs given the sovereign rating; it also enjoys the lowest risk weight among the corporate borrowers, for bank loans.

Over the next few years, while the core power sector may be a key growth driver, the company will also benefit from its foray into related sectors such as equipment financing and coal mining projects. PFC is also looking at consortium financing along with other banks, to fund power projects. It has also set up a private equity company which will invest equity in power projects. Delays in execution of power projects or policy related hurdles to power sector capex, are the key risks to the earnings outlook. Demand for loan restructuring and slippages in asset quality also pose risks to the outlook.