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PFCL FPO Review by Ajcon Global Services (Apply)

Review By Ajcon Global Services Ltd on May 10, 2011

Issue date: 10th May, 2011- 13th May, 2011
Issue size: Rs.46.5bn
FV: Rs.10
Price Band: Rs.193-203 per share
CMP: Rs. 211 per share
Fresh issue: 172.1 mn equity shares
Offer for sale: 57.3 mn equity shares
Issue structure:
50% - QIBs
35% - Retail
15% - Non Institutional Bidders
Discount: 5% for retail investors and eligible employees
Lot size: 28 shares
Equity shares prior to issue: 1,147.7 mn
Equity shares post issue: 1,319.9 mn
Post issue market capitalization: Rs. 267.9 bn at upper price band
Promoter: President of India acting through Ministry of Power, Government of India
Key Management: Mr. Satnam Singh - CMD, Mr. Mukesh Kumar Goel, Director (Commercial)
Book Running Lead Managers: DSP Merrill Lynch, Goldman Sachs (India), ICICI Securities, JM Financial
Registrar to the issue: Karvy Computershare

Objects of the Issue

  1. It intends to utilize the FPO proceeds in augmenting its capital base to ensure compliance with requisite capital adequacy norms and for future capital requirements.
  2. Offer for sale to carry out disinvestment process.

PFC is a leading financial institution in India focused on the power sector and is registered with the RBI as a non-deposit taking systemically important NBFC ('NBFC') and was classified as an IFC in July 2010. Earlier, the company was conferred with the status of Nav-Ratna PSU by Government of India on 22nd June, 2007. It has been identified as the nodal agency by the Ministry of Power for R-APDRP and for implementation of Ultra Mega Power Projects (UMPPs). Being present in power sector for over two decades, it has well established relationships with the GoI and State governments, regulatory authorities, major power sector organizations, Central and State power utilities, as well as private sector power project developers. It currently enjoy the highest credit ratings of 'AAA' and 'LAAA' for its long-term domestic borrowings and 'P1+' and 'A1+' for its short-term borrowings from CRISIL and ICRA, respectively. PFC's loan assets has witnessed a CAGR of 22.4% over the period FY06-10, to touch Rs. 798.5bn in FY10. As on December, 2010, it loan assets stood at Rs. 1,580bn.

In addition, its loan asset portfolio has increasingly become diversified by sector and customer base. As of December, 2010, 65.3%, of its total loan assets relate to state sector, 19.5% relates to central sector, 8.1% is to joint sector borrowers while 7.1% relates to private sector borrowers. The company has a major loan exposure to power generation projects accounting for 75%, whereas transmission projects and distribution projects account for 7.5% and 4.4% respectively. PFC's total income has been robust and has registered a CAGR of 26.9% to touch Rs. 81.2bn. On the other hand, PAT clocked a CAGR of 22.6% over the period FY06-10 to touch Rs. 22.5bn in FY10. NIMs stood at healthy 4.1% whereas Gross NPAs stood at 0.01% as on December, 2010. At the upper end of the price band of the issue price, the stock is valued at 1.4x its post issue Book Value.

Key positives

Power sector to drive growth, Comprehensive financial assistance platform focused on the Indian power sector PFC provides a comprehensive range of financial products and related advisory and other services from project conceptualization to the post-commissioning stage, to its clients in the power sector, including for generation (conventional and renewable), transmission and distribution projects as well as for related renovation and modernization projects. It provides various fund-based financial products including long-term project finance, shortterm loans, buyer's line of credit and debt refinancing schemes, as well as non-fund based assistance including default payment guarantees and letters of comfort. It also provides various fee-based technical advisory and consultancy services for power sector projects.

Power sector, a key infrastructure area, is perceived as the main driver of India's higher economic growth. The 11th Plan (2007-12) targeted 78,700 MW installed power generation capacity addition, while the 12th Plan (2012-17) aims at adding 1,00,000 MW. Ultra Mega Power Projects (UMPPs), would result in significant generation capacity addition, particularly from 12th Plan onwards, and Large Independent Transmission Projects on the lines of UMPPs will enable significant strengthening of transmission infrastructure.

This would provide company with good financing opportunities to fund projects with a long gestation period. The company's future strategy will be to accelerate growth by expanding the business in power sector and also by spinning off the new business units/ subsidiaries into individual companies with significant income stream, which will remain focused exclusively in their domain of operations.

Key negatives

Significant concentration of outstanding loans to public sector power utilities, many of which are historically lossmaking, and if these loans become non-performing, the quality of its asset portfolio may be adversely affected.

Conclusion / Investment Strategy

With due consideration to the all factors, we believe that valuations are justified and recommend investors to SUBSCRIBE the issue.

Reviewer recommends Subscribing to the issue.

Review By Ajcon Global Services Ltd on May 10, 2011