Maintain buy on PFC as stock trades at cheap valuations: ICICI Securities

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July 10, 2015 12:11 AM

Power Finance Corporation (PFC) has corrected almost 17% from its 52-week high and now offers a FY15 dividend yield of 3.5%.

Power Finance Corporation (PFC) has corrected almost 17% from its 52-week high and now offers a FY15 dividend yield of 3.5%. Concerns remain about the classification status of some assets within the non-private generation space, none of which have been categorised as restructured advances. If RBI denies special dispensation on these assets, the expected market disappointment from provisioning hit, is an event risk.

Apart from NBFC sector related worries, PFC seems to have also suffered from the negative news flow/commentary about health of state utilities. As outlined in our recent report on REC, ‘In doubt, lies opportunity’, we continue to believe that; (i) public utility related exposure faces near zero default risk and (ii) shareholder’s capital erosion or debilitating impact on full year earnings lie in the realm of the extreme improbable.

As we pointed out in our IC report, our repayment and revenue accrual related analytics suggest that while cash flows from borrowers did weaken in FY14, they are still reasonable.

To be cautious, we assume public restructuring to surface for the first time at 2.2% of overall loan book in Q1FY16e, which trims FY16e earnings by 2%, despite slightly raised NIM estimate. Our target multiple is unchanged at 1.1xP/BVPS factoring in aforementioned tail risks on government generation asset restructurin  provisioning. Rolling over to June 2017 yields a 12-month target price of R370.

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