Buy Power Finance Corporation - GEPL Capital

Power Finance Corporation Ltd was set up on 16th July 1986 as a Financial Institution dedicated to Power Sector financing and committed to the integrated development of the power and associated sectors. The Corporation is registered as a NBFC with the RBI. PFC was incorporated with an objective to provide financial resources and encourage flow of investments to the power and associated sectors, to work as a catalyst to bring about institutional improvements in streamlining the functions of its borrowers in financial, technical and managerial areas to ensure optimum utilization of available resources and to mobilize various resources from domestic and international sources at competitive rates.

Better Loan growth compared to banks

PFC's overall loan book grew by 23% in FY13 which is comparatively better than banks & also the growth remained stable over the previous year. It's sanctions grew by 26% in FY13 mainly due to allocation to generation assets. Also the share of state government at 65% continued to rule the loan book.

Sustainable NIMs

The major driver for sustainable NIM at 4.3%+ has been PFC's diversified borrowing mix favoring foreign currency borrowings & tax free bonds. The company plans to further diversify it's borrowing mix by issuing even more ECBs, low cost tax free bonds & large medium term notes in foreign currency. Better yields result in sustaining the Net Interest Margins further.

Asset Quality remains stable

There were no incremental NPAs in FY13 thus keeping the asset quality stable. PFC is also building a non specific provision against standard assets. Acceptance of the company's SEB restructuring package can lead to a better cash conversion cycle for related private sector infra companies, but the increasing share of projects in the private sector may raise asset quality concerns for the medium term.

Low Cost Model

PFC's productivity has significantly improved & also it's cost to income ratio has slipped to 2.3% in FY13 compared to 2.9% in FY12. Hence the lower the cost to income ratio the better efficient it is for the well being of the firm.

Valuation

At CMP of Rs. 137.95 the stock is trading at 0.68x & 0.60x it's FY14E & FY15E Book Value per share which we believe is attractive. We attach an exit P/BV multiple of 0.7x it's FY15E Book Value of Rs. 231.29 per share. Based on our valuation we arrive at the target price of Rs. 162 with a BUY rating & a potential upside of 18%.

Risk

- Increase in interest rates.

- Loan growth could be affected by slow down in the power sector which could in turn raise delinquencies.

Source : Equity Bulls

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