PFC FPO Review by ARM Research (Subscribe)

Review By ARM Research Pvt. Ltd. on May 11, 2011

Total Issue of Shares (Cr): 22.95
Fresh Issue by the company (Cr): 17.22
Offer for Sale(Cr): 5.73
QIB Investors (Cr): 11.46
Non -Institutional Investors (Cr): 3.44
Retail Investors (Cr): 8.02
Employee (Cr): 0.03
Issue opens on: 10th May, 2011
Issue closes on: 13th May, 2011
Price Band (Rs.): 193-203*
Lot size (No. of shares) and multiple 28
Face Value: Rs 10
Issue Size (Rs in Cr.): 4430.38- 4659.93
Equity Shares outstanding prior to the Issue (Cr): 114.78
Equity Shares outstanding after the Issue(Cr): 132.00

Offer for Sale

PFC is coming out with an FPO of 22.95 Cr shares of which 5.73 Cr Shares is the part of divestment by "Government of India" (GoI) for which PFC will not receive any proceeds. And the remaining portion i.e. 17.22 Cr of Shares is the fresh issue.

Object of the Fresh Issue

Augment its capital base to ensure compliance with requisite capital adequacy norms and to meet its future capital requirements arising out of growth in its business.

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.

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 nonfund based assistance including default payment guarantees and letters of comfort along with fee based technical advisory and consultancy services for power sector projects. 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 short term 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.

 

Risks & Concerns

1. 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.

2. PFC has not obtained sufficient security or collateral in connection with their loans.

3. It has huge contingent liabilities and in the event it materializes could adversely affect its business.

4. Risks related to power sector projects, particularly power generation projects, could materially and adversely affect its business, financial condition and results of operations.

5. Volatility in the interest rates affects its lending operations and may result in drop in its net interest income and net interest margin and adversely affect its return on assets and profitability.

6. Volatility in foreign exchange and un-hedged foreign currency could adversely affect its financial conditions and results of operations.

Valuation & Outlook

P/B ratio is currently at 1.51x multiples on the higher band of IPO price & 1.43x on lower end of IPO price. The Book value of PFC is Rs 134.28 as on 31 Mar, 2011

Investment Rationale

  • PFC is a NAVRATNE PSU which provides financial resources to the power and associated sectors and act as a catalyst in financial, technical and managerial areas to ensure optimum utilization of resources.
  • PFC has a significant portion of loans in portfolio with 3 and 10 year re-sets of interest rates, which lends stability to yields.
  • The secured nature of the company's loan book with negligible non-performing assets and the low cost-income ratio are key positives.
  • The total demand for India is expected to cross 950,000 MW by 2030.
  • With expected GDP of 9% above in years to come the demand for power is likely to be robust. Being the leader in the sector company is expected to how excellent results in future.
  • Capital Adequacy of the company will rise to 19% from 15.94 % after the FPO.

Conclusion / Investment Strategy

We recommend long term Investors to subscribe the issue. PFC is a NAVRATNE PSU which provides financial resources to the power and associated sectors.

Reviewer recommends Subscribing to the issue.

Review By ARM Research Pvt. Ltd. on May 11, 2011









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