Industry Issue Details Issue Opens Issue Closes NBFC 10-May-11 13-May-2011 Price Band ` 193-203 Issue Size (Bn) ` 4.5 Fresh Issue 172.1 mn equity shares Offer Sale 57.3 mn equity shares Post Issue Mar. Cap at upper band ` 27.9bn Face value ` 10 Lot Size 28 IPO Grading (CRISIL) 4/5 Discount to Retail 5% Shareholding Pattern (%) Promoter and Promoter Group Pre Issue Post Issue 89.7% 73.7% Others 10.3% 2.3% Share Reservation (%) QIB 50 Non Institutional 35 Retail 15 Key Management Mr Satnam Singh Mr Radhakrishnan Nagarajan CMD Director (Finance) Power Finance Corporation Power Finance Corporation Limited (PFC) is a Navratna Public Sector Unit, established in July 198. PFC is one of the leading power sector public financial institutions and provides fund as well as non fund based finances for entire gamut of power related activities. Apart from this it also provides technical and management advisory and consultancy services in the power sector. PFC has more than 20% share in the power financing business of the country. PFC plays a key role in the implementation of government policies and programs in the power sector. It has also been designated as the nodal agency by the government for the development of the now sixteen Ultra Mega Power Projects (UMPPs) in the country and it also the nodal agency for implementation of the Restructured Accelerated Power Development & Reform Programme (R-APDRP). PFC s loan assets have witnessed a CAGR of 22.4% over the period FY0-10, to touch Rs. 798.5bn in FY10. In addition, its loan asset portfolio has increasingly become diversified by sector and customer base. As of December, 2010, 5.3%, of its total loan assets relate to state sector, 19.5% relates to central sector, 8.1% is to joint sector borrowers while 7.1% relates to private sector borrowers. The company has a major loan exposure to power generation projects accounting for 75%, whereas transmission projects and distribution projects account for 7.5% and 4.4% respectively. Year Ended March FY09 FY10 FY11 Total Income 5 8103 1012.8 PBT 2011.7 303.9 3543.3 Reported PAT 149. 2250.1 218.8 Networth 1099. 12517.4 15411.8 NIMs (%) 3.9 4.0 4.1 Gross NPAs (%) 0.02 0.02 0.01 CAR (%) 17.15 18.3 17.38 ROE (%) 13.4 17.9 1.9 Book Value (`) 9 109 134 1
Objective of the Issue To augment the company's capital base to ensure compliance with RBI's capital adequacy norms and meet future capital requirements arising out of business growth. Offer for sale to carry out disinvestment process. Key Management Mr Satnam Singh, Chairman and Managing Director, holds a Master's degree in Finance and Marketing from the University Business School, Chandigarh. Mr. Singh has about 29 years of varied experience in varied areas of finance including, fund management, recovery, risk management, review of lending proposals and development of financial policies. Mr Radhakrishnan Nagarajan, Director Finance, is responsible for all functions of the finance division. He holds a Bachelor's degree in Commerce from the University of Madras and is a qualified Chartered Accountant, Cost Accountant and a certified associate of the Indian Institute of Bankers. He has had experience in the financial sector in various positions having worked with Andhra Bank and PFC in various positions. Key Positives Immense Opportunities in Power sector to drive growth The power sector is seeing increased opportunities, with major thrust coming in from the private sector. Power sector, a key infrastructure area, is perceived as the main driver of India's higher economic growth. The 11th Plan (2007-12) targeted 78,700 MW installed power generation capacity addition, while the 12th Plan (2012-17) aims at adding 1,00,000 MW. PFC provides a comprehensive range of financial products and related advisory and other services from project conceptualization to the post-commissioning stage, to its clients in the power sector, including for generation (conventional and renewable), transmission and distribution projects as well as for related renovation and modernization projects. It provides various fund-based financial products including long-term 2
project finance, short term loans, buyer's line of credit and debt refinancing schemes, as well as non-fund based assistance including default payment guarantees and letters of comfort. It also provides various fee-based technical advisory and consultancy services for power sector projects. Infrastructure Financing Company (IFC) status benefits PFC was formed with the mandate of financing power projects in the country. For several years the company focused on financing ultra mega power projects (UMPPs). However, In July 2010, PFC received the status of an Infrastructure Financing Company (IFC) from the RBI. IFC status allows the company to finance a wider spectrum of projects in the infrastructure space. PFC currently gets a significant portion of its funding from banks. Earlier, banks could only lend up to 15% of their capital to NBFCs like PFC. They can now raise their lending exposure to IFCs up to 20% of their funds. In addition, the lower risk weight on infrastructure lending can help PFC secure competitive interest rates from banks. Superior asset quality As a specialized power financier with a market share of over 20%, PFC has vast domain expertise in appraising power projects. The institution thus has one of the strongest asset quality positions amongst the financial entities in India. Due to this, even a decade after commencing its operations, PFC continued to have gross NPAs of less than 0.5% (0.01% as of FY11) and net NPAs at almost zero levels. Focus on new growth strategies PFC intends to undertake new initiatives, which will be future growth drivers. It intends to increase its focus on debt syndication activities in the power sector. The company is also in 3
the process of looking at potential equity investment opportunities in power sector projects. It looks at leveraging on its experience in the sector, existing client base, and financial strength and lending capability to invest the capital of a few profitable projects. It may also consider equity syndication opportunities for power sector projects, which will increase its fee-based income. Stable margins PFC has reported a consistent improvement in its interest spreads and margins in the last few years due to upward re pricing of yields on its asset portfolio coupled with a sharp decline in wholesale fund rates. We believe the Infrastructure Finance Company (IFC) status would help the company to stabilize its interest spread and NIM. Favorable credit rating and hence reduced cost of funds PFCs primary sources of funds include equity capital, internal resources and domestic and foreign borrowings. CRISIL and ICRA have granted it, the highest credit ratings of "AAA" and "LAAA", respectively, for its long term domestic borrowings and "P1+" and "A1+", respectively, for its short-term borrowings. International credit rating agencies Moody's, Fitch and Standard & Poor's have provided PFCs long-term foreign currency issuer ratings of "Baa3", "BBB-" and "BBB-", respectively, which are at par with the sovereign ratings for India. PFCs cost of funds in FY08, FY09, and FY10 and in the nine months ended December 31, 2010 was 8.0%, 8.7%, 8.1% and 8.4%, respectively, which is competitive. Key Negatives Delay in repayment of loans Large capital outlay and long repayment cycles makes power projects susceptible to changes in various factors such as interest 4
rates, regulations and policies and execution delays which may have an impact on the company s projects viability which will further impact the repayment of loans. Increased competition in private sector infrastructure financing Private sector participation in the addition of power capacity has been increasing over the years. It reached over 21% of the total installed capacity in India in March, 2011. In fact, the private sector is expected to contribute around 0% of this additional capacity in the sector by the Twelfth Five Year plan. PFC has been trying to increase private sector allocations over the past few years. This is a diversification from its mainstay of funding the state and central sector projects. Valuation and View At the upper end of the price band of the issue price, the stock is valued at 1.4x its post issue Book Value. We believe gradual improvement in macro environment in the power sector coupled with compelling valuation make good investment opportunity with medium to long term perspective and recommend investors to SUBSCRIBE the issue. 5
Key Financials Particulars Quarter Ended Year Ended Mar. 2011 Mar. 2010 % Var. Mar. 2011 Mar. 2010 % Var. Sales 217.34 2079.94 2 10128.47 8002.1 27 OPM % 99.54 99.4 0 98.82 99.98-1 PBDT 820.81 737.13 11 3548.33 3017.29 18 PBT 819.42 73.24 11 3543.28 3013.48 18 NP 0.75 00.77 1 218.79 2357.25 11 Peer Analysis PFC (9MFY11) (in ` Crs) REC (9MFY11) CMP (@ upper band) 203 223 FV 10 10 NII 280 2404 Net Profit 2012 1870 EPS 19 25.2 Networth 20072 12547 BVPS 145.7 127.1 P/E 10.7 8.8 P/BV 1.4 1.8 RoE 20.4% 21.1% NIMs 4.1% 4.5% Gross NPAs 0.01% 0.03%
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