PTC India Financial Services (PTCIND) 40

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1 Result Update Rating matrix Rating : Hold Target : 40 Target Period : 12 months Potential Upside : 0% What s Changed? Target Changed from 39 to 40 EPS FY17E Changed from 4.6 to 4.8 EPS FY18E Unchanged Rating Unchanged Quarterly Performance Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) NII Other income PPP PAT Key Financials Crore FY15 FY16E FY17E FY18E NII PPP PAT Valuation summary (YoY Growth) FY15 FY16E FY17E FY18E P/E Target P/E P/BV Target P/BV RoA RoE Stock data Particulars Amount Market Capitalisation 2559 crore GNPA (Q3FY17) 4.8% NNPA (Q3FY17) 0.9% NIM % (Q3FY17) 5.4% 52 week H/L 1.5 Net worth 1898 Crore Face value 10 DII Holding (%) 2.6 FII Holding (%) 9.2 Price performance (%) 1M 3M 6M 12M PFS REC PFC Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vishal Narnolia Vishal.narnolia@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com February 16, 2017 PTC India Financial Services (PTCIND) 40 Steady performance; asset quality manageable Asset quality deteriorated with GNPA at 459 crore vs crore in Q2FY17. GNPA ratio, therefore, surged to 4.78 from 4.29% QoQ PAT came in at 83.2 crore, above our estimate of 78 crore, led by a better-than-expected topline. NII came in above our estimate at crore but declined QoQ from 141 crore due to higher NPA NIM fell to 5.44% from 6.15%, owing to interest income reversal. Advances grew 23% YoY and 2% QoQ to 9613 crore, depicting reduced pace from 30% growth earlier. However, sanctions grew faster at 46% YoY with renewable segment taking larger share Other income remained stable at 20 crore, up 37% YoY. Sequentially, other income came in lower due to one-time gain on redemption of debentures held in one of the borrower companies Credit traction to continue ahead; renewable energy key driver PFS advances have grown exponentially at a CAGR of 45% in FY12-16 to 8301 crore at the end of FY16. PFS, initially, had the largest exposure to thermal power projects at ~60% till FY12, primarily sourced as a reference from parent company PTC India. The company is now able to garner business on its own with focus on small and medium renewable power projects, which constitute ~48% of the overall loan book. Owing to increasing competition from banking peers, we expect loan growth to moderate compared to previous fiscals at ~28.5% CAGR to crore in FY17-18E. Renewable energy loans are expected to comprise ~58% of the loan book increasing to 8013 crore by FY18E. Expect margins to stabilise at ~ %, benefit from MCLR to pour in PFS enjoyed NIM of 6.0% in FY15 due to higher yields of 13-14% on low ticket, mid-sized project lending. Leveraging on its power sector lineage, PFS is able to structure loans and provide other technical assistance to small developers, which enables it to command a higher yield. On the liability side, PFS, in the past, had the benefit of raising funds through low cost tax free bonds and ECBs. However, increasing competition among financial institutions is expected to exert some pressure on margins. We expect margins to inch up and stabilise at ~ % in FY17-18E, owing to a shift of bank borrowings to MCLR, which is expected to lower the cost of funds by ~20 bps. Asset quality to remain broadly stable PFS had zero NNPA and marginal GNPA till Q3FY15. However, NPA unexpectedly surged post Q4FY15 owing to pains in certain accounts. In Q1FY17, asset quality deteriorated, led by higher slippage from already restructured accounts, resulting in surge in GNPA ratio at 5.83% (3.4% QoQ). Going ahead, as the loan book size expands and book matures, we expect NPA accretion to moderate in FY17-18E. Consequently, we revise our GNPA estimate downwards and expect GNPA ratio at 4.5% at 470 crore in FY17E and 591 crore (GNPA ratio 4.3%) by FY18E. Accordingly, NNPA ratio is expected to inch lower at 2.5% in FY18E. Credit growth to continue, asset quality to stabilise With large growth opportunities in renewable energy project financing and PFS niche position, RoA, RoE still remain healthy and are expected at 3.0%, 15.2% in FY18E, respectively, aided by double digit PAT growth. Margins are expected to stabilise at %, with benefit from shifting to MCLR pouring in. Going ahead, we do not see any sharp asset quality deterioration at least in the near term. Therefore, we revise our target price at 40 per share, valuing the stock at 1.1x FY18E ABV at We maintain our HOLD recommendation on the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3FY17 Q3FY17E Q3FY16 YoY (%) Q2FY17 QoQ (%) Comments NII NII came in higher than estimate, though declined sequentially NIM (%) bps bps Sequential contraction in margins owing to interest reversal Other Income Net Total Income Staff cost Other Operating Expenses PPP Provision PBT Tax Outgo PAT PAT came in above our estimate led by a better-than-expected topline Key Metrics GNPA GNPA increased 49 bps QoQ at 4.78% NNPA NNPA increased 50 bps QoQ at 3.32% Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Net Interest Income Pre Provision Profit NIM(%) (calculated) bps bps PAT ABV per share ( ) Assumptions Current Earlier FY14 FY15 FY16E FY17E FY18E FY17E FY18E Credit growth (%) NIM Calculated (%) Cost to income ratio (%) GNPA ( crore) NNPA ( crore) ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Credit traction to continue ahead; renewable energy key driver PFS, as a strategy, has focused on being a financier to small and medium power projects. The company s management team has significant experience in the power sector and the financial services industry, which enables it to identify specific requirements of power project developers and offer structured products and services. PFS had started focusing on its debt financing segment post FY12. Since then, PFS advance has grown exponentially at a CAGR of 45% in FY12-16 to 8306 crore at the end of FY16. Initially, PFS had the largest exposure to thermal power projects at ~60% at the end of FY12. Most of these projects were primarily sourced as a reference from parent company PTC India, which helped it to expand its loan book initially. However, of late, the company has been able to garner business on its own with the share of thermal projects coming down to ~30% by the end of FY16 as exposure to renewable energy projects increased to ~44% of the loan book in FY16 from ~21% in FY12. Going ahead, now the focus has turned towards infrastructure projects including roads and ports, which currently form nearly 10% of total portfolio. Q3FY17 advances grew 23% YoY (lower compared to previous trajectory of ~30%) and 2% QoQ to 9613 crore. Fresh disbursements during the quarter were mainly due to renewable energy of 32 crore and other segments at 240 crore. Renewable energy loan growth was 24% YoY and 1% QoQ, lower than previous trajectory. Hence, its share in the total loan book declined from 48% in Q2FY17 to 45%. Focus on the infrastructure sector including roads and ports continue with exposure increasing in double digits. Owing to increasing competition from banking peers, we expect loan growth to moderate compared to the previous fiscal at ~28.5% CAGR to crore in FY17-18E. Growth may primarily be led by renewable energy and other loans. PFS sanction was at crore of which ~62% was to renewable projects. We expect the share of renewable energy loans to go up to ~58% increasing from 2456 crore in FY15 to 8013 crore by FY18E given that majority of the new sanctions/disbursements are to renewable energy projects. Exhibit 1: Loan book break-up We expect the share of renewable energy loans to go up to ~58% increasing from 2456 crore in FY15 to 8013 crore by FY18E 100% 80% 60% 40% 20% 0% , , Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 FY16 Q1FY17 Q2FY17 Q3FY17 FY17E FY18E Thermal Renewable Hydro Others ICICI Securities Ltd Retail Equity Research Page 3

4 Expect margins to stabilise at ~ %, benefit from MCLR to pour in Earlier, the borrowing cost was very low for PFS - as low as 8.2% at the end of FY13 on account of higher funding from ECBs of 418 crore (which were funded at Libor +3.25%) and low cost infrastructure bonds (coupon rate of 8.5%) put together comprising ~40% of total borrowings. NIMs, therefore, stayed very high at 9% in the past, also shored up by equity capital of 352 crore raised via IPO in The share of loans from banks and financial institutions in overall funding has increased to ~81% at 3122 crore by FY14 supporting the accelerated pace of growth in FY14. Since the lending rate of banks were hovering at the base rate, cost of funds (CoF) has, of late, gone up dragging spreads lower to 4% vs. 6% earlier. In the last couple of quarters, owing to a steeper decline in market interest rates, the borrowing mix is getting skewed towards commercial papers. Going ahead, we expect NII to grow at a CAGR of 23.1% in FY17-18E to 628 crore. Absence of lending avenues is seen increasing competition among financial institution exerting some pressure on margins. However, we expect margins to inch up and stabilise at ~ % in FY17-18E, owing to a shift of bank borrowings to MCLR, which is expected to lower the cost of funds by ~20 bps Further, to maintain accelerated growth, PFS may have to raise capital somewhere in FY17E or early FY18E. We have built in capital raising in FY17E to the tune of 600 crore in FY17E, which will support NIMs. Exhibit 2: Margins to stay close to % in FY17-18E Calculated NIMs expected to remain steady at % in FY17-18E. % Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 FY16 Q1FY17 Q2FY17 Q3FY17 FY17E FY18E NIM Spread Asset quality to remain broadly stable PFS had zero net non performing assets & marginal gross non performing assets till Q3FY15. Although there were no bad loans, PFS used to create high standard asset vs. 0.25% stipulated by the RBI. In Q4FY15, PFS reported a negative surprise with a surge in GNPA from 4.3 crore in Q3FY15 to 81.6 crore in Q4FY15 (GNPA ratio 1.28%) and NNPA came in at 63 crore in Q4FY15. This increase in GNPA was due to three loan accounts (already restructured), which slipped in FY15 with exposure of crore. Additional provision of 14 crore was made in FY15 in relation to exposure in one gas-based power project, which added to provision. Restructured assets were at 450 crore out of which projects with exposure of ~ 150 crore are operational. PFS made an investment of crore for a 37% stake in RS India Wind Energy Pvt Ltd. However, owing to a delay in DCCO, PFS provided crore in Q2FY15 and further crore in Q4FY15 due to ICICI Securities Ltd Retail Equity Research Page 4

5 misrepresentation of facts by the investee, thereby providing 100% of exposure. In Q2FY16, GNPA surged more than two times QoQ at 294 crore on the back of two accounts slipping during the quarter (already restructured) with exposure of ~ 216 crore. However, adequate provision for this exposure bodes well against any substantial impact on future profitability. Q4FY16 remained a steady quarter with respect to asset quality, absolute GNPA steady at crore and NNPA declining at 200 crore. Led by growth in the credit book, GNPA, NNPA ratios have declined QoQ by 37 bps, 42 bps to 3.4%, 2.35%, respectively. In Q3FY17, GNPA increased to 459 crore from crore in Q2FY17, led by classification of one account with exposure of 58.2 crore as NPA. GNPA ratio, therefore, surged to 4.78 from 4.29% QoQ. NNPA increased to 313 crore from 278 crore QoQ. We do not see any sharp asset quality deterioration, at least in the near term, as most thermal projects financed by PFS have reached the completion stage without much delay. Also, going ahead, lower exposure to thermal or coal linked projects and higher focus on low gestation and highly subsidised renewable energy projects will help maintain healthy asset quality. Also, involvement of the senior management in each sanction leaves less room for assets to turn non-performing at later stages. Going ahead, as the loan book size expands and book matures, we expect NPA accretion to moderate in FY17-18E. Consequently, we revise our GNPA estimate downwards and expect GNPA ratio at 4.5% at 470 crore in FY17E and 591 crore (GNPA ratio 4.3%) by FY18E. Accordingly, NNPA ratio is expected to inch lower at 2.5% in FY18E. Exhibit 3: Asset quality to stay steady ahead Crore FY12 FY13 FY14 FY15 FY16 FY17E FY18E 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% GNPA GNPA % Capital adequacy still strong, set to improve PFS capital adequacy ratio was at a healthy ~26.2% aided by lower risk weighted assets. In order to shore capital for future growth, PFS has raised ~ 308 crore via preferential allotment to promoter (PTC India) at 38.5 per share. We believe the company is currently adequately capitalised for accelerated growth. However, to maintain such a pace, we believe PFS will need to raise equity in FY17E-H2FY18E. We have built in total capital raising in FY17E to the tune of 600 crore. Further, monetisation of its equity investment can also aid it to strengthen its capital adequacy ratio. ICICI Securities Ltd Retail Equity Research Page 5

6 The equity investment book as on FY15 was at 340 crore (net of provisions). PTC Financial has struck a deal and exited Ind-Barath (Utkal) project in Q2FY16 at crore valued in the books at 105 crore. This deal shored up the Q2FY16 bottomline with one-time gain of 207 crore. Exhibit 4: Capital adequacy remains strong (%) Q3FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Capital adequacy (%) ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook and valuation We believe there is ample opportunity to grow in the power project financing space. PFS has been able to set itself up as a niche player in the renewable energy space. Healthy balance sheet growth is expected to aid book value (per share) expansion from 30.4 as on FY16 to 41.6 in FY18E. Owing to moderation in credit growth in the last few quarters, we continue to expect moderate credit growth compared to previous fiscals at ~28.5% CAGR to crore growth in FY17-18E. Going ahead, we do not expect a sharp increase in NPA as seen in FY15, Q2FY16 and Q1FY17. Consequently, we have broadly maintained our assumption on asset quality and now expect GNPA and NNPA ratio at 4.3% and 2.5%, respectively, in FY18E. RoA, RoE still remain healthy and are expected at 3.0%, 15.2% in FY18E, respectively, aided by double digit PAT growth. Margins are expected to stabilise at %, with benefit from shifting to MCLR pouring in. Going ahead, we do not see any sharp asset quality deterioration at least in the near term. Therefore, we revise our target price at 40 per share, valuing the stock at 1.1x FY18E ABV at We maintain our HOLD rating on the stock. Exhibit 5: Trend in return ratios 30.0 % FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E RoA RoE Exhibit 6: Valuation NII Growth PAT Growth P/E ABV P/ABV RoA RoE ( cr) (%) ( cr) (%) (x) ( ) (x) (%) (%) FY (22.6) FY16E FY17E (19.4) FY18E ICICI Securities Ltd Retail Equity Research Page 7

8 Recommendation History vs. Consensus ( ) (%) Jan-15 Mar-15 Jun-15 Aug-15 Oct-15 Jan-16 Mar-16 Jun-16 Aug-16 Nov-16 Jan Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Date FY11 FY12 FY14 Event PFS completes intial public offer (IPO) at 26. The company received the status of an infrastructure finance company from RBI Dr Pawan Singh joins the company as wholetime director and CFO of the company with Deepak Amitabh appointed as Chairman & Managing Director of the company. PFS raises ECB at attractive rates. It reduced its stake to 5% in India Energy Stock Exchange at a profit of 79 crore Divests stake in Meenakshi Energy at a profit of 82 crore. Advances surge to 4974 crore growing 117% YoY. PAT doubles to 207 crore from 104 crore in FY13 Q2FY16 Divests stake in Ind Barath Energy (Utkal) Limited at a profit of 206 crore. Top 10 shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 PTC India Ltd 29-Nov Life Insurance Corporation of India 30-Sep Dimensional Fund Advisors, L.P. 31-Oct JPMorgan Asset Management U.K. Limited 30-Sep Van Eck Associates Corporation 30-Nov IDFC Asset Management Company Private Limited 30-Nov Sahara Asset Management Company Pvt. Ltd. 31-Dec BlackRock Institutional Trust Company, N.A. 31-Dec TIAA Global Asset Management 30-Sep BlackRock Advisors (UK) Limited 30-Nov Source: Reuters, ICICIdirect.com Research Recent Activity Shareholding Pattern (in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Promoter FII DII Others Buys Sells Investor name Value Shares Investor name Value Shares PTC India Ltd 45.66m 80.20m JPMorgan Asset Management U.K. Limited -0.79m -1.40m BlackRock Institutional Trust Company, N.A. 0.00m 0.00m Mellon Capital Management Corporation -0.40m -0.72m Edelweiss Asset Management Ltd m -0.41m Dimensional Fund Advisors, L.P m -0.18m BlackRock Advisors (UK) Limited -0.00m -0.00m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E FY18E Interest Earned , ,494.6 Interest Expended Net Interest Income % growth Non Interest Income Net Income Employee cost Other operating Exp Operating Income Provisions PBT Taxes Net Profit % growth EPS ( ) Key ratios (Year-end March) FY15 FY16 FY17E FY18E Valuation No. of Equity Shares EPS ( ) BV ( ) BV-ADJ ( ) P/E P/BV P/adj.BV Yields & Margins (%) Yield on interest earning assets Avg. cost on funds Net Interest Margins Spreads Quality and Efficiency Cost / Total net income GNPA% NNPA% RONW (%) ROA (%) Balance sheet Crore (Year-end March) FY15 FY16 FY17E FY18E Sources of Funds Capital Reserves and Surplus Networth Borrowings Other Liabilities & Provisions Total 6,734 8,852 11,437 14,662 Applications of Funds Fixed Assets Investments Advances Other Assets Total 6,734 8,852 11,437 14,662 Growth ratios (% growth) (Year-end March) FY15 FY16 FY17E FY18E Total assets Advances Borrowings Total Income Net interest income Operating expenses Operating profit (excl trading) Net profit Book value EPS (22.6) (31.5) ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (NBFC) CMP M Cap EPS ( ) P/E (x) P/ABV (x) RoA (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E LIC Housing Finance (LICHF) Hold 27, Reliance Capital (RELCAP) Hold 11, HDFC (HDFC) 1,398 1,570 Buy 220, PTC India Financial Services (PTCIND) Hold 2, CARE (CARE) 1,375 1,650 Buy 3, Bajaj Finserv (BAFINS) 3,593 3,620 Buy 57, Bajaj Finance (BAJAF) 1,060 1,300 Buy 56, ICICI Securities Ltd Retail Equity Research Page 10

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

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