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Q1FY22 results of Power Finance Corporation Ltd

According to the brokerage “The company has reported weak growth figures for the Q1FY22; however, the asset quality numbers have improved. Net Interest Income for the quarter stood at Rs.3,525 Cr, up 14.7% for both YoY and QoQ. NIM for the quarter was at 3.7% – up 40 bps QoQ backed by higher lending yields. Management intends to pass on the fall in funding cost in coming quarters. Operating profit grew by 29.5% YoY, while sequentially it was down by 10.5%. Other income was down by 92% QoQ, this has resulted in 2% sequential de-growth in Net profit.”

HDFC Securities has stated that the company’s “Total AUM of Rs. 369983 Cr grew by 7.3%/1.4% YoY/ QoQ. Disbursement during the quarter was weak, due to overall weak demand from the sector. It was down by 45% YoY and 18% QoQ. Under Atamnirbhar Discom Scheme the company has so far sanctioned Rs.67,699 cr and disbursed Rs. 38,501 cr. The company has also declared an interim dividend of Rs. 2.25/- per equity share of Rs. 10/- each for FY22.”

The brokerage claims that “As of Q1FY22, the Capital Adequacy Ratio (CAR) stood at 21.16% with Tier – I capital ratio at 17.56%. Being a Government-owned entity, PFC has the highest domestic credit rating of “AAA” and international ratings stood at “BBB-“. PFC has a well-diversified resource profile with 63% money raised from bonds, 20% via loans from various entities, 1% from commercial papers (CP) and 16% via foreign currency loans. Further, ~86% of the foreign currency exposure with 5 years residual maturity is hedged.”

The brokerage’s take on Power Finance Corporation Limited

According to the research report of the brokerage “Further, to tap into newer areas of opportunities, the company is looking to fund segments like e-mobility, utility scale energy storage etc. The company has a sufficient capital adequacy level and resources profile is also diversified. The Indian government has recently accorded “Maharatna” status to PFC which will enable it greater operational and financial autonomy to offer competitive financing for the power sector, which will go a long way in making available affordable and reliable ‘Power For All 24×7. This will also help PFC in pushing the government’s agenda of funding under the National Infrastructure Pipeline, a national commitment of 40% green energy by 2030 and effective monitoring and implementation of the New Revamped Distribution Sector Scheme with an outlay of more than Rs.3 Lakh Cr.”

HDFC Securities has also claimed in its research report that “PFC is a consistently high dividend paying company, the yield at the current price stands at ~7.3% which makes it one of the highest dividend paying companies in the listed space. For the last five years, the average dividend payout as a percentage of equity share capital stood above 40% (except for FY19). PFC’s high dividend seems sustainable as it has lent to relatively risk-free public sector entities and its capability to distribute dividends remains good even in case a good portion of its private sector lending goes bad. The stock is trading at only 0.5x FY23E P/ABV. We feel that such high dividend yield and low valuations provide a margin of safety for investment in the company at the current level.”

Buy Power Finance Corporation Ltd with a target price of Rs. 167

HDFC Securities has noted in its research report that “Since the past few quarters, the company has been able to deliver strong growth momentum along with considerable improvement in the asset quality. Also, the emerging trend in the power sector gives us confidence in the company’s ability to keep growing at a fast growth rate. We have envisaged 6% CAGR growth for top line and 8% for bottom line, while the loan book is estimated to grow at 7.5% CAGR over FY21-23E. We feel that worst in terms of asset quality deterioration in the power finance segment is over. There could be higher recoveries in the next two years than slippages. Further PFC is also holding sufficient provisions. RoAA is estimated at 2.2% for FY23. In the medium term, credit cost normalisation and cost control remains the key drivers for stable RoA and RoE.”

According to the brokerage’s call “We feel that investors can buy PFC at the LTP of Rs.137.3 (0.5xFY23E ABV+ REC value after holding company discount) and add on dips to Rs.123 (0.43xFY23E ABV+ REC value after holding company discount) band. We expect the Base case fair value of Rs.157 (0.6xFY23E ABV+ REC value after holding company discount) and the Bull case fair value of Rs.167 (0.65xFY23E ABV+ REC value after holding company discount) over the next 2 quarters.”

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.