Offer for Sale Note View Rating: Unrated Issue Details Auction Date Issue Size No of Shares on offer Fresh Issue *Based on offer price on 25 July 2015 July 27, 2015 1676 crore* 6.6 crore Nil Shareholding Pattern Pre -Issue Post - Issue# No Of Shares (in Crore) 132 132 Promoters(%) 72.8 67.8 Non-Promoter (%) 27.2 32.2 #Considering 5% equity stake sale Objects of the issue It is an offer for sale wherein the entire proceeds will go to the promoters of the company ie GoI by way of disinvestment and no proceeds shall go to the company Stock data Market Capitalisation 34261 Crore GNPA (FY15) 2364 crore NNPA (FY15) 1890 crore NIM (FY15) 4.93 52 week H/L 316 /220 Equity capital 1320 Crore Face value 10 DII Holding (%) 9.7 FII Holding (%) 12.9 Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com July 27, 2015 Power Finance Corporation Floor Price 254 The Government of India (GoI) has launched an offer for sale (OFS) of 6.60 crore equity shares of 10 each of Power Finance Corporation (REC) aggregating to ~5% of the total paid-up equity share capital. The floor price has been decided at 254. Retail investors will receive shares at a discount of 5% and are allocated 20% of issue size. PFC manages net interest margin of 4.9% and reported a net profit of 5959 crore in FY15. Largest Indian financial instiution with power sector focus PFC is a specialised institution for power sector financing in India. It is primarily focused on the thermal and hydroenergy generation areas. It has also initiated financing of projects based on renewable energy sources. Its loan book as on FY15 stands at 217516 crore. Of total loans ~69% of advances belong to state power utilities, 8% to central power utilities, 17% to private power utilities and 6% to joint sector power utilities. Borrowise-wise, major exposure is in generation segment with ~73%, while transmission, distribution contributes 6%, 3%, respectively. Strong NIM above 4.5% sustained in tough environment With the power sector facing major hurdles including fuel supply uncertainty and stretched balance sheet, coming to surface in the last 18-24 months, the pricing environment has become robust. This led to an improvement in yield for PFC by ~50 bps in FY12-15 to 12.4% in FY15. Accordingly, NIM improved from 4.4% in FY13 to 4.9% in FY15. On the liability side, bonds continue to remain the major contributor with ~85% of borrowing mix. Ability to issue tax free bonds and infrastructure bond gives PFC relative cost advantage. Softening of wholesale borrowing rates coupled with government parentage will aid steady margins. Asset quality under pressure led by power generation PFC, being mainly into power sector finance, partly reflect the state of India s power sector, which has been reeling under pressure due lack of fuel availability and weak financial health of power institutions especially SEBs. Owing to pains in power sector, GNPA, which remained steady in FY13-14, has risen to 1.09% in FY15. Restructured assets spiked in FY15 and stood at ~ 20,500 crore. As PFC s restructured loans cover only its private sector loans, it does not reflect the actual asset quality stress in SEB segment and remains a overhang for the stock. Long term demand strong in power sector, near term concerns stay Power sector entails investments over US$500 billion targeted during FY12-17E, focus on renewable enery is also growing. With PFC s leadership in power financing and superior domain knowledge, its loan growth is expected to remain strong. However, current concerns over scarce domestic fuel supply and high imported fuel prices, lower capacity utilisation at plants, etc have kept the power generation as well discoms under stress. This has led to surge in PFC s restructured assets also. Reasonably valued - long term story intact At the offer floor price of 254, PFC is available at 1.08x P/ABV on trailing FY15 ABV basis. As retail investors will be offered another 5% discount to offer price, it comes to 241.3 per share. Accordingly, the stock will be available at 1.05x FY15 ABV (and 0.9x FY16E ABV based on consensus estimate). The stock is available at reasonable valuations considering the strong return ratios at RoA of 3% and RoE of 20% on a consistent basis. Near term concerns in the power sector may result in the stock consolidating around same levels. However, over the longer term, the government s thrust on power sector will keep financing demand bouyant and, thereby, beneficial for PFC on loan growth and overall profitability.
Financials Profit and Loss Account (Year-end March) FY13 FY14 FY15 Interest Earned 17076 21121 24828 Interest Expended 10768 12641 14956 Net Interest Income 6308 8480 9872 growth (%) 44 34 16 Other income 23 34 15 Operating cost 145 231 217 Provisions -81 470 844 PBT 6105 7813 8825 Extra-ordinary items -138-225 -447 Taxes 1415 2086 2503 DTL/DTA -132-54 84 Net Profit 4420 5418 5959 growth (%) 46 23 10 EPS 33 43 47 Source: Capitaline, Company, ICICIdirect.com Research Balance Sheet (Y ear-end March) F Y 13 F Y 14 F Y 15 Sources of Funds C apital 1320 1320 1320 R eserves and Surplus 22256 26055 29059 Shareholders' funds 23576 27375 30379 Borrowings 139473 159215 187773 O ther Liab & P rov (incl sub-debt) 6180 1095 1169 T otal 169229 187685 219321 Uses of Funds Fixed Assets 74 71 64 Investments 158 348 932 Advances 160396 189231 217516 O ther Assets 8601-1966 809 T otal 169229 187685 219321 Page 2
Ratios (%) (Y ear-end March) F Y 13 F Y 14 F Y 15 Valuation No. of E quity S hares 132 132 132 EPS ( ) 33.5 42.5 47.4 BV ( ) 165.7 207.4 244.1 BV-ADJ ( ) 160.7 202.1 234.1 P/E 2.0 2.0 2.0 P/BV 1.6 1.3 1.1 P/ABV 1.6 1.3 1.1 Y ields & Margins (% ) Net Interest Margins 4.4 4.9 4.9 Yield on assets 11.9 12.3 12.4 Avg. cost on funds 9.1 8.9 9.0 Q uality and E fficiency (% ) GNPA ( crore) 1135.0 1228.0 2364.0 NNPA ( crore) 1013.0 985.0 1890.0 GNPA 0.7 0.7 1.1 NNPA 0.6 0.5 0.9 RoE 21.6 22.0 21.0 R oa 2.9 3.2 3.1 Page 3
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, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com Page 4
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