We had been skeptical of the risks to Power Finance Corporation’s (PFC) near- to medium-term earnings following implementation of UDAY.
We had been skeptical of the risks to Power Finance Corporation’s (PFC) near- to medium-term earnings following implementation of UDAY. However, progress this far has been encouraging both on growth and NIMs fronts.
Despite repayment of `320 billion of discom debt under UDAY scheme, loan growth is anticipated to be in positive trajectory with working capital and refinancing demand on strong turf. Structural improvement in state utilities should have exerted pressure on lending yields, but lack of aggressive pricing competition is helping PFC sustain NIMs upwards of 4%.
Encouraging response from respective states to UDAY and positive results seen in few discoms – reduction in AT&C losses, power purchase cost, narrowing gap between cost and revenues and interest cost savings – will also help resolve and upgrade larger part of state utilities’ stressed pool.
The stock trades at 0.9x FY19E P/ABV, which factors in overhang of some stressed exposure, though recognition is unlikely in near- to medium-term. We upgrade to ‘BUY’ with earnings set to surprise on positive side, RoE of 15-16% and dividend yield of 4.5%.
Our revised TP is pegged at `190.Out of the `488 billion discom debt, `239 billion loan amount was repaid till Q3FY17 under UDAY and recently another `90 billion was repaid by Tamil Nadu having signed the MoU. With 65% of discom debt already repaid, there will not much further run-down seen from UDAY implementation.
Against this backdrop, growing demand for refinancing, working capital and traction in other avenues (renewable and generation segments, among others) will likely boost disbursements’ growth to more than 35% in FY17 over FY16. This will push up loan growth to near 4-5% levels versus our earlier expectation of 0-2%.We had been skeptical about implementation of UDAY as well as performance of some private sector stressed exposure, which posed risks to PFC’s earnings.
While it has played out to some extent, the impact was milder than earlier envisaged. Even though there are some more stressed exposures, we believe significant recognition is unlikely in near- to medium-term. This could re-rate the stock to 1.25x FY19E P/ABV.