PFC - Investment thesis intact; dividend payout guidelines to inculcate long-term discipline - ICICI Securities

RBI's draft circular on dividend declaration by NBFCs links eligibility and quantum of dividend distribution to net NPA, CRAR and leverage. For PFC, categorised as NBFC-ND-SI, based on its past three years' CRAR and current net NPA print, the criteria matrix (as per draft circular) makes it eligible to dividend payout up to 25% of earnings (vs its current policy of 30% of earnings or 5% of net worth, whichever is higher). However, eligibility criteria are expected to accelerate structural improvement of PFC's balance sheet for it to pay out higher dividends (shore up CRAR to >18% and contain net NPA to sustain at <2% for 40-45% payout). Note that being a PSE, the government would be keen to receive higher dividend from PFC. In any case, dividend yield would remain above 6%, hence there is no change in our investment rationale. Given PFC's balance sheet expansion of >10%, steady-state RoE profile of >14% and anticipated stress resolution, we maintain BUY on the stock.

- Draft RBI circular links dividend payout to net NPA, CRAR and leverage: RBI's draft circular subjects NBFCs to comply with certain criteria for distributing dividends from FY21 onwards. In case of PFC, which is a systemically important non-deposit taking NBFC (NBFC-ND-SI), the eligibility criteria include: a) at least 15% CRAR for past three years (including the accounting year for which dividend is proposed); b) net NPA ratio below 6% in each of the past three years; c) proposed dividend should be payable only out of the current year profit; and d) extraordinary profits/income to be excluded for net profit calculation.

- PFC eligible to pay up to 25% of net profit in near term, though it can be structurally higher in the longer term: PFC's past 3-year CRAR for FY21 dividend eligibility will be in the range of 15-18% and FY20 net NPA at 3.8%. Company therefore falls in category 'C' as per the criteria matrix and is eligible to pay out 25% dividend (vs its current policy of 30% of net profit or 5% of net worth, whichever is higher). This translates to a dividend of Rs7-8/share for FY21E. At CMP, PFC's yield would still be higher than 6% (better than prevailing G-Secs). In addition, a relatively lower dividend payout for the year will result in higher book value accretion.

- Investment thesis intact; guidelines inculcate long-term discipline: Our investment thesis on PFC remains unchanged. In fact, we expect the company to work towards containing net NPLs below 2% and shore up CRAR to above 18%, so that payout can increase to 40-45%. This is possible with big-ticket resolutions going forward. Thus, the guidelines are structurally positive as they inculcate long-term discipline.

- Final guidelines may be a non-event for PFC: We expect the final circular from RBI to be released by Jan'21 (last date for submission of comments is 24th Dec'20). There is a likelihood of state-owned NBFCs being exempted in the final guidelines as government is keen to receive higher dividends from profitable PSEs (DIPAM issued an advisory in Nov'20 to PSEs to pay higher dividends). In such a situation, there will be no impact on PFC.

Shares of POWER FINANCE CORPORATION LTD. was last trading in BSE at Rs.117.3 as compared to the previous close of Rs. 114.5. The total number of shares traded during the day was 403764 in over 1938 trades.

The stock hit an intraday high of Rs. 119.1 and intraday low of 114.6. The net turnover during the day was Rs. 47414996.

Source : Equity Bulls

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