PFC FPO Review by HDFC Securities (Subscribe)

Review By HDFC Securities Limited on May 10, 2011

Issue Open: May 10 - May 13, 2011
(For QIB bidders FPO closes on 12th May 2011)
Price Band: Rs. 193 - Rs. 203 (5% discount on issue price to retail investors and employees)
Issue Size: Rs. 4430.38 cr - 4659.93 cr
Issue Size: 229,553,340 equity shares (incl fresh issue of 17.22 crs shares and offer for sale of 5.73 crs shares)
Face Value: Rs 10
Book value: Rs 125.11 (December 31, 2010)
Bid size: 28 equity shares and in multiples thereof
100% Book built Issue
Capital Structure:
Pre Issue Equity: Rs. 1147.76 cr
Post issue Equity: Rs. 1319.93 cr
Already Listed: BSE & NSE
Lead Manager: DSP Merrillynch Ltd, Goldman Sachs (I) Securities Pvt Ltd, ICICI Securities Ltd, JM Financial Consultants Pvt Ltd
Registrar to issue: Karvy Computershare Pvt Ltd

The object of the offer for sale is to carry out the divestment of 57,388,335 equity shares by selling shareholder. The company will not receive any proceeds from the Offer for sale.

The objects of the Fresh Issue are to:

  • Augment its capital base to ensure compliance with requisite capital adequacy norms & to meet its future capital requirements arising out of growth in business.
  • General corporate purposes.

Power Finance Corporation Ltd is a leading financial institution in India focused on the power sector, which was established as an integral part of, and continues to play a strategic role in, the Government of India's (GoI's) initiatives for the development of the power sector in India. For the development and implementation of policies and structural and procedural reforms for the power sector it works closely with GoI instrumentalities, State governments and power sector utilities, other power sector intermediaries and private sector clients in India. In addition, it is involved in various GoI programs for the power sector, including acting as the nodal agency for the UMPP program and the R-APDP and as a bid process coordinator for the ITP scheme. Comprehensive range of financial products and related advisory and other services from project conceptualization to the post-commissioning stage are provided 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 also provides various fund based and financial assistance, including project finance, short term 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 along with fee based technical advisory and consultancy services for power sector projects. 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. Strategically it has expanded its focus areas to include projects that represent forward and backward linkages to the core power sector projects, including procurement of capital equipment for the power sector, fuel sources for power generation projects and related infrastructure development and also intend to fund power trading initiatives. Equity capital, internal resources and domestic and foreign borrowings are the primary sources of funds of PFCL. Currently it enjoys the highest credit ratings for its long-term domestic and shortterm borrowings from CRISIL and ICRA respectively.

It is registered with the RBI as a non-deposit taking systemically important Non Banking Financial Company (NBFC) and was classified as an Infrastructure
Finance Company (IFC) in July 2010. Its IFC classification enables it to effectively capitalize on available financing opportunities in the power sector in India. In addition, as a government-owned NBFC, loans made by PFCL to Central and State entities in the power sector are currently exempt from the RBI's prudential lending (exposure) norms that are applicable to other non-government owned NBFCs. However, it follows prudential lending norms and guidelines approved by the MoP with respect to loans made to Central and State entities in the Indian power sector, while its loans made to the private sector are generally consistent with lending (exposure) norms stipulated by the RBI. Classification as an IFC enhances its ability to raise funds on a cost-competitive basis (including through issuance of Rupee-denominated infrastructure bonds that offer certain tax benefits to the bondholders), and increase its lending exposures to individual entities, corporations and groups, compared to other NBFCs that are not IFCs.

PFCL's total loan assets increased from Rs 355,819.18 million as of March 31, 2006 to Rs 798,557.56 million as of March 31, 2010, at a CAGR of 22.4%. Its total loan assets further increased to Rs 921,182.57 million as of December 31, 2010. As of December 31, 2010, its total loans sanctioned pending disbursement (net of any loan sanctions cancelled) was Rs 1,580,005 million. It had gross NPAs of Rs 131.63 million, Rs131.63 million, Rs 131.63 million and Rs 131.63 million as of March 31, 2008, 2009 and 2010 and December 31, 2010, respectively, which represented 0.03%, 0.02%, 0.02% and 0.01% of its total loan assets, respectively, as of such dates.

Concerns:

• PFCL has a significant concentration of outstanding loans to certain borrowers, particularly public sector power utilities, many of which are historically loss making, and if these loans become non-performing, the quality of its asset portfolio may be adversely affected.
• PFCL may not have obtained sufficient security or collateral in connection with its loans, or may be unable to recover, or experience delays in recovering, the expected value from such security or collateral, may have a material adverse effect on its business, financial condition and results of operations and the trading price of its Equity Shares.
• Ability to compete effectively is dependent on PFCL's ability to maintain a low effective cost of funds; an inability to do so could have a material adverse effect on its business, financial condition and results of operations and the trading price of its Equity Shares.
• An increase in the level of PFCL's NPAs could adversely affect its financial condition.

Reviewer recommends Subscribing to the issue.

Review By HDFC Securities Limited on May 10, 2011









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