PFC FPO Review by Naman Securities (Apply)

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Review By Naman Securities and Finance Pvt. Ltd on May 10, 2011

Issue Date: 10th May - 13th May 2011 (For QIB bidders closes on 12th May 2011)
No. of Equity shares to be issued (mn shares): 229.5
Face Value (Rs): 10
Fresh issue (mn shares): 172.2
Outstanding Equity Shares (pre - issue) (mn): 1147.8
Outstanding Equity Shares (post - issue) (mn): 1319.9
Price Band (Rs): 193 - 203
Issue Size (Rs mn): 44293.5 - 46588.5

Note: Retail investors and eligible employees would be offered a discount of 5% on the final issue price fixed.

Issue Objects

Power Finance Corporation (PFC) intend to utilize the entire Net Proceeds to augment capital base to meet the future capital requirements arising out of growth in assets, primarily loan portfolio due to the growth of the Indian economy & the Indian power sector, and for other general corporate purposes.

Power Finance Corporation (PFC) was incorporated as a Financial Institution (FI) for power sector financing in 1986, which later in 1990 was notified as a Public entity. Besides the power financing, PFC also work as a catalyst to bring about institutional improvements in streamlining the functions of its borrowers in financial, technical and managerial areas. Based on its consistent performance and extensive accomplishment in the field of electrification, PFC has been rewarded as Navratna status by government in 2007. Besides its major exposure to power generation projects, it also lends to transmission & distribution business.

Growth Drivers

Benefits from huge growth in power sector

Power Finance Corporation is one of the key players for the financing of power projects. Due to the huge demand - supply gap in power sector and massive requirement of power, the government is focusing on the development of more power projects which in turn would boost the business of PFC. The low per capita consumption of electricity in India compared to the world average presents significant potential for sustainable growth in the demand for electric power in India. The revised power capacity addition of 62,000 MW (from 78,700 MW earlier) is estimated in the 11th Five year plan while in the 12th five year plan, power generation capacity of 100,000 MW is targeted which would require a sum of Rs 11,000 bn. It has ~85% exposure to generation power projects, hence huge investment in generation projects would benefits PFC as the projects would require lot of money to be borrowed.

Strong Business Growth, zero net NPA

PFC's business has grown well over the last few years and based on the thrust for new power capacity, we believe PFC would continue to post robust growth in its disbursement and loan book. In the 9 months ending 31st December 2011, it has made a disbursement of Rs 222.7 bn; growing 45% against 9M FY10 while it's Sanctions grew by ~57% in the same period. Its outstanding Loan book stands at Rs 920 bn as of Q3FY11, growing ~27% as against Rs 723 bn as of Q3FY10. Its loan book increased to Rs 798 bn in FY10 from Rs 355 bn in FY06, showing 22.4% CAGR over FY06 - FY10. As the company maintains its high asset quality and lends essentially to state and central sector; it has been able to maintain its Net NPA at almost negligible level. Net NPA as of Q3FY10 was nil while it had almost negligible Net NPA of 0.01% as of FY10.

Increasing low cost borrowings

PFC has been classified as Infrastructure Finance Company (IFC) in July 2010. As a result they are now eligible to issue infrastructure bonds and foreign borrowings; which in turn would facilitate funds at lower cost. Hence we believe the IFC status would help them to stabilize their interest spread and NIM.

Other business verticals

PFC has expanded their interest for 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. The company is also planning to fund power trading. The significant capacity addition in the Indian power sector requires augmentation of equipment manufacturing capacities for capital equipment for all segments of the power sector. PFC plans to provide financial assistance for manufacturers of equipment used in the power sector.

RISK

1. Any financial instability of State electricity boards (SEBs) or State power utilities (SPUs) SEBs could have its adverse effect on NPA of PFC as it lend to ~65% of its total outstanding loan to state sector. However we believe that as SEBs/SPUs are backed by government body; hence there should not be any significant adverse effect on its operations.

2. Any delay in implementing the power project would have its affect on PFC funding structure and this may affect profitability of the company as well.

3. Any rise in interest rate would increase the interest cost of the company as it borrows a huge sum. If the company could not pass on the increased burden due to higher interest rate, then it would hamper company's profitability.

We are quite positive on the power capacity development going ahead and hence there will be huge investment in power. We expect a strong growth in disbursement and loan book of PFC. At the lower price band of Rs 193/share, the stock is trading at 1.78x its FY10 book value of Rs 108.2 and 1.54x its book value of 124.78 as on 9M FY11. While at the upper price band of Rs 203/share, the stock is trading at 1.87x its FY10 book value of Rs 108.2 and 1.62x its book value of 124.78 as on 9M FY11.