Dear All,
Forwarding you the FPO Note on Power Finance Corporation with a Subscribe recommendation and a Target Price of `254.
Strong growth outlook: The surge in power sector projects in the past few years, especially from the private sector, has led to a sharp increase in funding requirements, visible in PFC’s huge outstanding loan sanctions of `1.7lakh crore. This alone provides high loan growth visibility in the next few years (we have factored in a 25% CAGR in loan growth over FY2012–13E). Moreover, with banks having seen a 47% CAGR in power sector lending in the past two years, their exposures in most cases have reached close to board-mandated limits, creating even more space for specialised lenders such as PFC to grow. This will be further aided by the company’s expanded net worth post the FPO and higher concentration limits pursuant to an infrastructure finance company (IFC) status.
Healthy profitability: Structurally, as is the case with several other niche NBFCs, regulatory arbitrage vis-à-vis banks allows PFC to earn healthy NIMs, further aided by its close-to-sovereign credit rating. Moreover, reduction in risk weightage from 100% to 20% due to the IFC status makes funding from banks ~100bp cheaper. Cyclically, we have conservatively factored in a 50bp NIM compression over FY2012–13E due to rising funding costs. That said, the recent underperformance of the stock, in our view, over discounted the ~75bp sequential NIM compression in 4QFY2011 (calculated), which was partly on account of large bond and ECB issuances (issue costs accounted upfront) as well as large disbursements towards the quarter-end.
With 87% of loans to public sector utilities so far, asset quality has not been an issue irrespective of the financial health of utilities. In our view, the scenario pertaining to PSU borrowers is likely to remain unchanged, further aided by the likely benign approach towards any required restructuring and NPA recognition pertaining to such loans, given quasi-sovereign status as well as systemic issues of the alternative. The increasing proportion of private sector loan sanctions, in our view, does increase the risk profile. Though, in any case, this is unlikely to manifest in the next few years, when most loans relate to projects under implementation, the substantial valuation discount to PFC’s historical valuation range provides further margin of safety.
Attractive valuations: At the CMP, the stock is trading at 1.1x FY2013 P/ABV. Historically, the stock has traded at 1.2-2.2x one-year forward ABV with a median of 1.75x. Considering asset-quality issues that could creep up as exposure to private sector increases, we have assigned an FY2013E P/ABV multiple of 1.4x, 20% lower than PFC’s median P/ABV multiple since listing. The resultant target price of `254 implies an upside of 25% from the upper end of the price band. Hence, we recommend Subscribe to the issue.
Kindly click on the following link to view the Report.
If you have any further queries, feel free to call us on 022 39357600, Extn: 6865 or mail us at advisory@angelbroking.com
With best regards,
Fundamental Advisory Desk
Angel Broking
Akruti Star,6th Floor, Road No.7,MIDC, Andheri (E),Mumbai – 93.
Call : (91) (022) 39357600 Ext. 6865
Website : www.angelbroking.com
Disclaimer: Ours is an advisory role. The final decision and consequences based on our information is solely yours. Moreover, in keeping with regulatory guidelines, we do not guarantee any returns on investments. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice.
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