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Review By MLR Securities Private Ltd on May 11, 2011

CMP: 214
Future: May 26th 208.5
Price Band: INR 193-203
(5% discount to retail investors)
Issue Date: 10th May - 13th May
Issue Size: INR 4,660 Cr
Market Capitalisation: INR 25,475 - 26,795 Cr
Promoters Holding: 74% (Post Issue)
BRLM: BoFA ML, Goldman Sachs, ICICI Sec, JM Financial

Power Finance Corporation, a Navratna company incorporated in July 1986, with the main objective of financing power projects, transmission and distribution works and the renovation and modernization of power plants. In addition, the NBFC is also involved in various GoI programs for the power sector including acting as the nodal agency for the Ultra Mega Power Projects Program and the R-APDRP and as a bid process coordinator for the Independent Transmission Projects (ITP) scheme.

The issue comprises of fresh issue of shares worth Rs 3,500 Cr and an offer of sale of Rs 1,165 Cr by the President of India, through the Ministry of Power. The net proceeds from the fresh issue of shares will be utilized towards augmenting the capital base to ensure compliance with requisite capital adequacy norms and to meet future capital
requirements.

The company's post issue market cap will increase to almost Rs 27,000 Cr at an upper price band of Rs 203. The price to book value will fall to 1.4 from the existing 1.5 which is at a marginal discount to its closest peer REC despite the former having a bigger asset base. The company will be commanding a post issue price earnings multiple of 10.2 which is at a premium to REC at a discount when compared to IDFC.

• The company reported a Net Interest Margin of 4% in FY10 with NIMs of 4.1% in FY11. The company's incremental rupee lending interest rates are normally made with either three year or ten year interest reset clause. In order to manage pre-payments risk, the company's policy is to require a pre-payment premium to be paid by the borrower in case of pre-payment. In addition, all loan sanction documents specifically entitle the company to vary the interest rate on the undisbursed portion of any loan.
• As an IFC, PFC have access to low cost funds as it is eligible to raise, under the automatic route (without the prior
  approval of the RBI), ECBs up to US$500.00 million each fiscal year, subject to the aggregate outstanding ECBs
  not exceeding 50% of Owned Funds.
• PFC's total loan assets increased at a CAGR of 19% from Rs 35,582 Cr in FY06 to Rs 99,571 Cr in FY11. As of 9mFY111 total loans sanctioned pending disbursement was Rs 158,000 Cr. The total income grew at a CAGR of 26.9% to Rs 8,613 Cr in FY10 while PAT grew at a CAGR of 23% to Rs 2,250 Cr in FY10. The company posted standalone total income of Rs 10,128 Cr and PAT of Rs 2,619 Cr in FY11.
• As of 9mFY11, 75% of the total loan assets represented loans to power generation related projects, 7.5% to transmission projects, 4.4% to distribution projects and the rest was for renovation and modernization to power generation companies.
• PFC has strategically expanded its focus areas to include projects that represent forward and backward linkages to the core power sector projects, including capital equipment for the power sector fuel sources for power generation projects and related infrastructure development as well as power trading initiatives.
• PFC's capital adequacy ratio stood at 17.31% as of 9mFY11 and will increase to 19.1% post issue which is well above the RBI stipulated 15% for an Infrastructure Financing Company. In FY11, RoE stood at 19.3% while the Return on Assets was at 2.4%.
• PFC's primary sources of funds are equity capital, internal resources and domestic and foreign borrowings. PFC also enjoy the highest credit ratings of 'AAA' and 'LAAA'' for long-term domestic borrowings and 'P1+' and 'A1+' for short-term borrowings from CRISIL and ICRA, respectively. International credit rating agencies Moody's, Fitch and Standard & Poor's have granted long-term foreign currency issuer ratings of 'Baa3', 'BBB-' and 'BBB-', respectively, which are at par with the sovereign ratings for India.
• The NBFC had gross NPAs as a percentage of total advances of 0.03%, 0.02%, 0.02% and 0.01% as of FY08, FY09, FY10 and 9mFY11 respectively. The company had consistently maintained excellent asset quality as the company had put in place number of different security and quasi security arrangements in relation to the loans the company
  extend for example PFC can have a priority claim over the surplus revenue from State power utilities over any loan granted by the relevant State government to other entities, security in the form a charge over the relevant project assets or an irrevocable guarantee from the state government.

Industry Overview

• The total capacity addition during the past 25 years between the 6th Five Year Plan and the 10th Plan was approximately 92,000 MW. The latest revised target capacity addition for the 11th Plan is 78,700 MW (56.7% of which had been achieved as of March 31, 2011) this is expected to result in significant investments in the power
  generation sector.

• A tentative capacity addition of approximately 100,000 MW has been envisaged for the 12th Plan. The total fund requirement to achieve the targeted capacity addition is estimated at Rs 11,000 billion, with an estimated Rs 4,950 billion, Rs 2,400 billion, Rs 3,710 billion being required for generation , transmission and distribution projects respectively. 

Management

Mr Satnam Singh is the CMD of the company since Aug, 2008. He joined the Board as Director in Feb, 2005. He is working with the company since 1996. He was a member of the APDRP Steering Committee constituted by the GoI. He has been nominated to be a part of a high level panel approved by the Prime Minister of India on 'Financial Position of Distribution Utilities' to suggest measures to improve the viability of the power distribution sector. He is also the member of a High Level Committee on Financing Infrastructure constituted under the chairmanship of Dr. Rakesh Mohan.