Power Finance Corporation (PFC) reported Rs 34 bn loss in Q4FY17 as the company realigned with RBI norms (earlier MoP, GoI approved norms). Hence, GNPLs spiked to Rs 307 bn (12.5%) and restructured book jumped to Rs 554 bn (22.5%) with consequent provisioning and income reversal hit. On the positive side, however, the entire incremental recognition was towards state sector loans, wherein current recovery rate is 97% and risk of default is low.
We believe, no reflection of stress in private sector projects despite realignment is a blessing in disguise. With large part of stress recognition in FY17, earnings will be privy of performance of this stressed pool. Management’s detailed account-wise disclosure indicates that large part of incremental stress recognition will be upgraded over the next 12-24 months, lending some comfort. We are, therefore, not revising our FY18 and FY19 estimates. However, knock in FY17 net worth (by `16 per share) coupled with overhang of single sector exposure and concentration risk leads to downward revision in target price to Rs 173
(1x FY19E book; earlier Rs 190). Maintain Buy.
Outlook and valuations: Recovery holds key; maintain ‘BUY’
FY17 marks a year of stress recognition. However, as majority of it pertains to state utilities, recovery is just a matter of time
(estimates >70% of GNPLs to be upgraded by FY18). Thus, it is not justifiable to adjust net worth for entire unprovided NPLs as LGD in case of state utilities will be negligible. Hence, we are valuing it on book value, though given exposure to single sector, valuations may be capped at 1x FY19e P/BV. Consequently, we trim target price to Rs 173 (Rs 190 earlier).