Power Finance Corporation - Stress pool declines, valuations alluring - ICICI Securities

Power Finance Corporation's (PFC) Q3FY21 earnings were characterised by decline in stress pool, sustained NIMs (3.6%), growth moderating and deferment of interim dividend announcement. 1) Stage-3 assets, as anticipated, declined to 5.85% (from 7.2%) with restructuring of RKM Powergen and other resolutions underway. Credit cost came in at 150bps due to higher provisioning requirement towards TANGEDO (on annual rating downgrade). 2) Disbursements under special liquidity scheme have slowed down momentarily, though will pick-up pace. This, coupled with the repayment of some chunky generation projects and delayed project implementation, led to a sequential decline in loan book. 3) Interim dividend announcement was deferred impending regulator's final guidelines on NBFCs dividend distribution policy. Revising earnings upwards, rolling over to FY23 and assigning 0.9x FY23E adjusted book, we revise target price to Rs 191 (previously: Rs 151). Maintain BUY.

- Stage-3 assets declined with RKM Powergen restructuring; resolutions underway for other projects: On resolution of RKM Powergen of Rs51bn outside of NCLT, stage-3 assets declined from 7.2% in Q2FY21 to 5.85% in Q3FY21. Recovery rate on RKM was 60% and it was restructured with the existing promoter through sustainable and unsustainable debt (4 units of 360MW, 3 of which are operational and the remaining unit will be operational in sometime). The account was adequately provided for and it was P&L neutral (release of Rs20bn in provisioning). The company expects Jhabua Power, South East UP, India Power (Haldia) to resolve over next 2-3 quarters. Few projects might take slightly more time for resolutions namely Lanco Amarkantak (bids received are below the recovery rate anticipated), KSK Mahanadi (joint resolution post merger of two subsidiaries), and Ind Barath Energy Utkal (bid of JSW was withdrawn).

- Credit cost of 150bps; rating downgrade of TANGEDCO required higher provisioning: One of the company's stage-1 borrowers' (TANGEDCO with exposure of Rs 300bn) annual rating was downgraded from category B to category C. This called for an additional provisioning of Rs6bn as per ECL guidelines, which has resulted in elevated credit cost. Also, provisioning on stage-3 was enhanced to 61%. PFC holds 65% coverage towards Rs162bn worth of assets (17 projects) under NCLT resolution while it holds 47% provision for assets worth Rs51.6bn outside NCLT resolution (7 projects). Detailed account-by-account analysis suggests limited downside risk to stress accretion and that will be more than offset by resolutions in advanced stages. We have now build credit cost of 1.0%/1.4%/0.6% for FY21E/FY22E/FY23E, respectively. Higher haircut with delayed resolution may pose risk to our credit cost estimates.

- Special discom package to boost disbursement trend: Under special Atmanirbhar discom package, PFC and REC together have sanctioned Rs1.25trn, of which, Rs460bn is disbursed till date. Of this, PFC has disbursed Rs219bn with further Rs80bn expected in Q3FY21. Pace of disbursements under the scheme has slowed down momentarily but is expected to pick up going forward. Some portion of its share in tranche-2 of Rs300bn is likely to be disbursed in Q4FY21.

- Lower demand and higher repayment weigh on loan portfolio growth: Some delay in implementation and lower demand for project-based financing in generation segment led to slower disbursements in Q3FY21. Moreover, couple of borrowers in generation segment prepaid their loans leading to run-down in loan book. We are building in loan growth of 11-14% for PFC over FY21-23E. Slower than anticipated pick up in project financing and liquidity scheme demand may settle loan growth below our estimates.

- Spreads improved to 3.2%: Yields remained stable at 10.68% and benefitting from 13bps QoQ decline in funding cost, interest spreads improved to 3.2%. The company is looking to pass on the benefit of lower funding cost to its customers and incremental lending to low yielding liquidity discom package may weigh NIMs lower.

- Interim dividend deferred impending final guidelines from RBI: The company is evaluating requirements highlighted in draft guidelines issued by the regulator relating to dividend distribution by NBFCs. Consequently, it has deferred the announcement of interim dividend (historically announced along with Q3FY21 result). It is also looking to shore up capital adequacy, and is in discussion with government with respect to dividend distribution policy.

Shares of POWER FINANCE CORPORATION LTD. was last trading in BSE at Rs.130.95 as compared to the previous close of Rs. 126.5. The total number of shares traded during the day was 1224587 in over 7539 trades.

The stock hit an intraday high of Rs. 132 and intraday low of 126.65. The net turnover during the day was Rs. 159946868.

Source : Equity Bulls

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