Maintain ‘buy’ on Power Finance Corporation (PFC) with a target price of R397 per share. PFC continues to deliver strong operating performance with superior NIMs, stable NPLs and sustained 15% plus loan growth. While lower investment activity derailing growth and continued restructuring will be key monitorable, positive developments are expected in project clearances which can drive the valuation upwards going forward. In view of the flurry of announcements to address the power sector’s long-term structural issues and improved condition of SEBs post financial restructuring, the stock has potential to re-rate from current 0.9x FY17e price to adjusted book value (P/ABV) with RoA and RoE of 3% and 20%.
PFC reported Q3FY15 PAT of R1,540 crore, which surpassed our estimate on lower provisions. Disbursements were lower than estimates at R10,200 crore (down 17% y-o-y). For nine months of FY15 disbursement were 11% lower than nine months of FY14, arresting loan book growth to sub-16% levels (lowest in past many quarters). However, strong NIMs (>5%) supported NII growth of 17.7% (albeit below trend).
GNPLs remained steady (0.96%) as there were no slippages during the quarter, however slippage from restructured pool will be key monitorable going forward. During Q3FY15, PFC made additional provisioning of R146 crore towards private sector restructured portfolio of R17,550 crore. The company will make similar provision in Q4FY15 taking outstanding provision to 2.75%.