PFC reported mixed Q4FY15 results. Loan growth was healthy at 15.0% y-o-y and margins were strong at 4.9% and remained close to peak. However, project specific (generation, distribution and transmission) disbursements and sanctions remained weak and growth was primarily driven by other loans given to state electricity boards (SEBs).
We are marginally reducing our estimates by 4% in FY16 and 3% in FY17 as we factor in higher provisions and slightly lower margins. Lower rates are positive for margins in the near term as lending rates are stable; however, in the medium term, we expect margins to decline as lending rates would come down and loan book would re-price lower. Consequently, we are factoring in margin decline of 25bps over FY16-FY17e.
We believe that asset quality risks have eased significantly on SEBs exposure and likely acceleration of power sector reforms would provide more comfort on exposure to private projects and long term loan growth. While likely sale of 5% stake by government is a near term overhang, we think valuation is in-expensive at 1.0x FY16 P/BV given 18-20% ROEs.
We maintain our ‘buy’ rating and target price of R375/share. Our price target is based on residual income model and implies 1.2x FY17 P/BV and 6.7x FY17 P/EPS.