March 9, 2023
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POWER FINANCE CORPORATION, Resolutions aiding asset quality improvement; AUM growth key for further rerating
Call & Research Report by ICICI Securities
Sector: Finance Term Lending
CMP Rs. 148, Target Rs. 191 (29% upside potential)
Target Period: 12 Months
Power Finance Corporation’s (PFC) Q3FY23 earnings surpassed I-Sec estimates – buoyed by provisioning write-back of Rs1.3bn. Flow of resolutions led to 54bps QoQ and 115bps YoY decline in stage-3 pool to 4.21%, while adequate provisioning towards the same also led to 12bps QoQ and 81bps YoY decline in net stage-3 to 1.19%. Drawing down from sanctions pipeline, disbursements grew 36% YoY in 9MFY23. Incremental sanctions under various power schemes revive hope on loanbook growth gathering pace gradually (was up 4% QoQ and 6% YoY). Of the total foreign currency portfolio, 62% (68% QoQ and 55% YoY) has been hedged to minimise the impact of INR depreciation; PFC booked forex translation/ transaction loss of Rs2.6bn in Q3FY23. It declared an interim dividend of Rs8.75/share in 9MFY23, which works out to ~28% payout of PAT in 9MFY23 Given the inexpensive valuations at 0.6x FY24E P/ABV, coupled with improving asset quality metrics and likely gradual uptick in AUM growth, we maintain BUY on the stock with an unchanged target price of Rs191 (0.8x FY24 P/ABV).
One project resolved during the quarter and a total of five during the past 12 months: In line with the company’s earlier guidance, Ind-Barath Energy Utkal exposure of Rs13.7bn was resolved under NCLT. The project has been taken over by JSW and PFC has sufficient provisioning towards the same. Hence, over the past 12 months, PFC has resolved five stressed assets, amounting to Rs59.6bn. These five assets are: Essar Power MP (Rs13.45bn), RS India Wind Energy (Rs2.24bn), South-East UP Power Transmission (Rs22.63bn), Jhabua Power (Rs7.64bn) and Ind-Barath Energy Utkal (Rs13.68bn). As a result, stage-3 pool now stands at 4.2% vs 4.8% QoQ and 6.1% YoY while net stage-3 is now at 1.2% vs 1.3% QoQ and 2.0% YoY
Currently, 22 stressed projects of Rs165bn are in stage-3 – of which 12 projects totaling Rs110bn are being resolved under NCLT and the remaining 10 projects of totaling Rs56bn are being resolved outside NCLT. Furthermore, 2 projects – namely Dans Energy with exposure of Rs4.1bn and Lanco Amarkantak Power with exposure of Rs23.8bn – are in advanced stages of resolution. Incremental resolutions are likely to keep the stress pool under check.
PFC has further clarified that it does not have any exposure to any of the listed companies of Adani Group. However, PFC has provided loan to various project-specific SPVs in Adani Group with outstanding of Rs83.14bn. These project SPVs have separate cashflows and security structure.
Coverage ratio healthy at 71.8%: Coverage ratio on stage-3 assets has fallen a tad to 71.8% (72.4% QoQ and 67.0% YoY). It now carries provision of 76% on stressed projects being resolved under the NCLT and 64% on other stressed projects. Given that the company has already made >70% provision towards stage-3 assets and recoveries are not leading to any incremental provisioning, we are looking at provision write-backs for FY23E as well as FY24E.
Drawdown from sanctions pipeline supports disbursement traction: Drawing down from robust sanctions pipeline, disbursements gained traction growing 36% YoY for 9MFY23 and 46% QoQ / 177% YoY for Q3FY23. Higher disbursements growth was largely on the back of distribution-related projects, which comprised 65% of incremental quarterly disbursements. As a result, loanbook was up 4.4% QoQ / 5.8% YoY at Rs3.93trn.
During Jun’22, the ministry of power notified the Electricity (Late Payment Surcharge (LPS) and Related Matters) Rules, 2022. PFC has sanctioned Rs468bn (Rs455bn QoQ) and disbursed Rs144bn (Rs66bn QoQ) to discoms for clearance of dues under the LPS Rules. As per the LPS guidelines, the sanctioned amounts will be disbursed gradually to discoms in EMIs ranging from 12 to 48 months based upon the outstanding dues amount of the discoms being covered under the LPS. PFC has also sanctioned Rs182bn (Rs174bn QoQ) and disbursed Rs111bn (Rs45bn QoQ) so far under the Revolving Bill Payment Facility (RBPF).
Revamped Distribution Sector Scheme (RDSS) was introduced in Jun’21 by the government of India, which is being jointly managed by PFC and REC. Herein, all the states and UTs have been allocated between PFC and REC equally. Based on the commitments of 11 states w.r.t. Action Plan, the Union government has approved projects worth Rs1.16trn to discoms of these states under the RDSS, which will be funded through a mix of grant, equity and counterparty loans.
PFC group can now lend to infrastructure and logistics sector up to 30% of outstanding loanbook of PFC, subject to the condition that for every financial year, 2/3rd of new sanctions should be for power and green energy projects only. Hence, as disbursements pick up going forward, loan asset growth is envisaged to gather pace, gradually. We are building-in loan growth of 4%/ 7% for PFC in FY23E / FY24E, respectively.
Yield expansion moderates, while rise in funding cost pulls down margins: Yield on advances for Q3FY23 rose 3bps QoQ to 10.10% while cost of funds also rose 19bps QoQ to 7.50%. As a result, spreads contracted by 16bps QoQ to 2.60% and margins moderated 11bps QoQ to 3.45%. Therefore, net interest income was down 1% YoY and 7% QoQ. Heightened competition from banks, coupled with moderate demand, and rise in funding cost are likely to result in some margin pressure in coming quarters.
CRAR sustained above 24%; announced interim dividend of Rs3.5/share (Rs8.75/share in 9MFY23): PFC has been focusing on building an adequate capital buffer. CRAR was steady at 24.41% with tier-I capital at 21.34% (21.13%/ 20.95%/ 20.00%/ 19.07%/ 18.42%/ 17.56% in Q2FY23/ Q1FY23/ Q4FY22/ Q3FY22/ Q2FY22/ Q1FY22) and tier-II capital at 3.07% (3.16% QoQ). It announced an interim dividend of Rs3.5/share (cumulative Rs8.75/share in 9MFY23), which is equal to ~28% payout on 9MFY23 consolidated EPS. We believe PFC will continue with its policy of declaring dividend equivalent to 30% of earnings, or 5% of net worth, whichever is higher.
Hedging proportion was improved to minimise the impact of INR depreciation: Due to adverse foreign currency movement, PFC booked forex translation loss of Rs2.6bn (Rs6.5bn). As of Q3FY23, ~77% (95% QoQ) of forex borrowings with residual maturity of up to 5 years have been hedged. On total foreign currency portfolio, ~62% (68% QoQ and 55% YoY) portfolio have been hedged. Total outstanding foreign currency borrowings portfolio stands at an USD equivalent to 7.56bn, of which 84% are USD denominated borrowings, 11% JPY and remaining 5% EUR.
Key risks: 1) Higher haircut with delayed resolution may pose risk to our credit cost estimates, and 2) slower than anticipated demand pick-up in project financing and liquidity schemes may result in correspondingly slow loan growth.
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