Power Finance Corporation Ltd - Stock Valuation and Financial Performance

Shares of public sector banks and NBFCs were under pressure on Monday, falling up to 12 % after the Reserve Bank of India proposed tighter rules to govern lending to projects under implementation. Power Finance Corporation (PFC) tanked 9% to Rs 438 and REC slipped 7% to close at Rs 516. Despite today's decline, PFC and REC have zoomed more than 70 % in the past six months.

The RBI, on Friday, proposed to set a floor for NBFCs/banks' loan exposure for project finance for consortium lending and mandated 5% standard asset provisioning in the construction phase. This was published under the draft guidelines on “Prudential framework for Income Recognition, Asset Classification and provisioning pertaining to advances – projects under implementation”. 

With these guidelines, the RBI has significantly enhanced the provisioning requirement during the construction phase of a project from existing 0.4% to 5.0%, for all existing and fresh exposures.

Impact: 

This will be implemented in a phased manner with 2% to be provisioned in FY25, 3.5% till FY26 & the full 5% to be provisioned by FY27. Also, pursuant to certain conditions the provision shall be reduced to 1% after the project reaches operational phase. 

This will lead to incremental provisioning of ~1-1.5% of the outstanding loan book. Provisions shall be majorly in the Generation segment as construction period for the same is higher than in Transmission & Distribution. Renewable segment which is showing significant growth in disbursals shall not be significantly impacted as construction phase can be even lower than a year (Excluding Hydro).  

Improving landscape of the Indian Power sector: 

The power sector in India, particularly in the realm of electricity distribution companies (Discoms), has witnessed a positive transformation in recent years:

• Reforms implemented by the government under the Revamped Distribution Sector Scheme (RDSS) have led to notable improvements. 
• All India-level AT&C losses (Aggregate technical and commercial losses ie. Electricity lost between generation to end use) have decreased from 21.5% in FY21 to 16.5% in FY22, signifying better operational efficiency. 
• The ACS-ARR gap, representing the revenue gap per unit of electricity sold, has significantly improved to 40 paise per unit in FY22 compared to 89 paise per unit in FY21.

Additionally, implementing the Late Payment Surcharge (LPS) Rules has substantially reduced legacy dues payable by distribution utilities from a peak of Rs. 1.4 lakh crore to Rs. 66,478 crore. This fiscal discipline in the sector, aided by rigorous monitoring of dues through the PRAAPTI portal, has benefited all stakeholders across the power sector value chain.

Major Generation, Transmission, and distribution companies are planning significant Capex : 

Capital expenditure (capex) initiatives by major players like NTPC and Power Grid Corporation drive growth prospects for entities like PFC. Power Grid Corporation foresees substantial investments exceeding Rs. 4 lakh crore in the transmission sector over the next 7 to 8 years, estimating its transmission capex at Rs. 1.71 lakh crore up to 2032.

The Indian Renewable Energy Development Agency Ltd (IREDA) which recently came up with an IPO highlighted that installed renewable power capacity is expected to reach 595 GW(Gigawatt) by FY2032 and account for 66% of the total power generation capacity. A total outlay of Rs. 24 trillion is expected for renewable capacity additions between FY23 to FY32.

Similarly, NTPC aims to expand its capacity to over 130 GW by 2032 with a planned capex of approximately Rs. 3 lakh crore over the next 7 years. This includes adding 10 GW of conventional capacity (coal) with an estimated capex of Rs 80,000 crore within the next 3 years. Additionally, NTPC plans to increase its renewable capacity by 16 GW with an estimated capex of Rs. 90,000 crore.

These substantial capex plans by major power generation and distribution companies signify manifold growth opportunities for PFC, the NBFC financing the power sector. The positive trends in the sector's financial health, particularly improvements in Discoms' operational efficiency and significant capex plans by key players, indicate a favorable environment for PFC's growth and financing activities within the power sector. 

Good results with stable NIM & reduction in NPAs. Infrastructure sector lending up to 30% of advances to help diversify & grow loan book.

Market Cap 31,813Cr
CMP 120
P/B 0.42

Check 10 year X-ray here

Key Highlight

• NIM compressed due to lower growth in yield on advances at 10.07% (+6bps on quarterly basis) than yield cost of funds at 7.31% (+23bps quarterly basis).
• Asset quality improved with higher resolutions, GNPA & NNPA declined by 92 & 61 bps at 4.8% and 1.3%.
• PFC was given permission to lend infrastructure and logistics sector, as well incremental power projects.
• Additional provisioning improved provision coverage ratio (PCR) to 72.42% of stressed asset, higher PCR implies loss recognition and sufficient capital to withstand asset quality declines.

PFC | Market Cap 32,606 Cr

CMP 124 | Hold

Results: PFC reported a year on year growth of 16.8% in its Net Interest Income*. For FY21, the disbursements grew 30% year on year and stood at Rs. 88,300 Cr. 

Click here for 10 year X-ray

Key Highlights

• The loan assets grew 12% during FY21 and net NPAs reduced to 3.57% (vs 4.2% in FY19).
• Disbursement was high at Rs. 28,350 Cr (growth of 36.6% year on year), mainly helped by state government-guaranteed loans to SEBs. Due to the availability of adequate provisioning, there was no impact on profitability.
• Yield was down to 10.58% in FY21 from 10.63% in FY20 due to a reversal of interest-on-interest charge. This was to keep rates competitive versus peers.
• PFC is tapping new areas for loan disbursement, renewable energy and E-mobility (around Rs. 570 Cr disbursed to EV in FY21).
• Under the Atamnirbhar Discom Scheme, loans sanctioned stood at Rs. 68,914 Cr and disbursed at Rs. 36,439 Cr.
• The company has hedged ~86% of forex loans (maturing up to 5 years) to avail comfort over volatile forex losses (from 66% before).
• The dividend for FY21 was Rs. 10 per share. 

Outlook: As per the management, the company has reduced its interest rate in Apr’21 to make it competitive with banks. The revised rate will be available for new loans, and older loans will be re-priced on the reset dates. The prepayments are expected to be very low in FY22 and loan growth will be better. 

A few projects are in final stages of resolution: Jabua Power (Rs. 2,190 Cr) and Essar MP (Rs. 1,345 Cr) (expecting 45-50% recovery). Other than this, Dam Energy and Sheega Energy will be resolved in current year. Resolutions in the pipeline may be delayed with the Covid second wave impacting NCLT’s functioning.

Fund raised in FY21 was Rs. 81,062 Cr (bonds Rs. 41,000 Cr). The board has approved fund raising (borrowing) of Rs. 1 lakh Cr for FY22.

Moneyworks4me Opinion: We expect good returns from quality PSUs as they have healthy dividend yield and prices are beaten down. Today PFC trades at 0.7x adjusted Price to Book value and has dividend yield upwards of 8% even in future. It has ROE of 15%+ and NPAs are coming down with resolution of stranded assets.

After adjusted for all the inefficiencies of public sector companies, if stocks are cheap, we find merit in having some allocation to these stocks. Currently, we have 3-4 stocks in PSUs. You need to ensure PSUs don’t exceed 15% of your portfolio.

*Net Interest Income- Interest Received minus Interest Paid