Samco’s Picks of the Month – March 2023

Power Finance Corporation

CMP: Rs. 1,731.95

Recommendation: Buy

Investment Horizon: 1 to 3 Years        

Urmi Shah – Research Analyst

Date – 31.01.2023

Outlook and view

Power Finance Corporation is a Non-Banking Financial Institution (NBFC), which provides financial assistance to Power companies. The company has performed well in the past, with growth across all metrics delivering healthy returns for its shareholders. The strong emphasis on Make in India has opened many doors for foreign companies to set up manufacturing in India. This will enhance the power requirement. The current boom in the capital expenditure cycle and indigenization will further enhance the growth prospects for the company. Also, the business intends to expand its presence in the renewable segment as well which gaining traction.

Strengths

Focus on the financing of renewable energy projects – In FY2021-22, 15% of their gross loan assets comprised renewable energy. This figure is expected to increase in the future. During the year, there was a 1.5 times increase in their EC bond portfolio, which stood at Rs. 3999 crores (as of 31.03.2022).

Robust financials – PFC has delivered healthy growth over the past few years. It has grown its revenues by 23% and 12% CAGR in the last 5 and 3 years. The net profit has compounded at 44% and 12% CAGR in the past 5 and 3 years, respectively. It clocked a return on equity of 19% in the past 3 years. 

Macro-economic Tailwinds – Central government schemes like UDAY (Ujwal DISCOM Assurance Yojana), the financial turnaround and revival package for distribution companies in India, have met with limited success. Strong demand outlook as the energy demand is expected to increase. The company intends to align its business operations to leverage emerging opportunities in Ē-mobility and increased thrust in the transmission and distribution (T&D) space.

Revised norms by the government – The Revamped Distribution Sector Scheme (RDSS) is a reform-based and results-linked scheme, which plans to reduce AT&C losses to 12-15% by FY 2024-25 and reduce the ACS-ARR gap to zero through financial support to Discoms for upgradation of the Distribution Infrastructure and Prepaid Smart Metering & System Metering. PFC (along with its subsidiary REC) are the designated nodal agency for the operationalisation of this scheme. Under RDSS scheme an outlay of Rs. 3,03,758 crores and a Government grant of Rs. 97,631 crores is planned of which REC and PFC are the primary beneficiaries.

Consistent Decline in the non-performing assets – PFC’s standalone Gross NPA and Net NPA have consistently slid down in the past 3.5 years. From GNPA of 9.4% in FY19 to 4.75% in H1FY23. The NNPA has fallen as low as 1.31% for the first half of FY23 from 4.55% in FY19.

Risks

Risk of default – The Company runs a risk of default especially given the company concentrates on giving loans to the power sector. Any lag in the development projects or issues with permissions etc. can lead to default of payments by the borrowers.

High customer concentration – There are few players in the sector. PFC being a product concentration company, will loan funds to these concentrated number. This increases the risk as the money is limited to few hands and poses as a risk for PFC.

Valuations

Recently, the company’s stock price has witnessed a strong rally. Despite that the company seems to have more headroom to grow. It currently trades at a Price to Book of 0.52, at par with its median P/B of 0.5x. With the reforms now taking shape, the company is in an attractive phase ready for growth.

About the Company

Incorporated in 1986, Power Finance Corporation Ltd. is a Schedule-A Maharatna Central Public Sector Enterprises (CPSE) and is a leading Non-Banking Financial Company (NBFC) in the country. Their portfolio includes financial products and services such as rupee term loans, short-term loans, equipment lease financing, transitional financing services, etc. for various power projects in the generation, transmission, and distribution sectors. The clients mainly include central power utilities, state power utilities, private power sector utilities (including independent power producers), joint sector power utilities and power equipment manufacturers.

Financial Overview

(Rs. Crores)Mar-18Mar-19Mar-20Mar-21Mar-22H1FY23
Operating Income25,97628,83434,06237,74538,54519,112
Operating Profit (Excl OI)22,79827,88030,05132,57434,83717,362
ROCE (%)9.039.648.859.229.23
PBIDTM (%)87.8499.9588.2788.5690.690.86
PATM (%)16.8924.1116.622.372626.73

Story in Charts

Starting with the GNPA% and NNPA%, the company has seen a decline in the same.

Source: Company Filing

Loan Assets mainly comprise of financing to public sector as of March 2022.

Source: Company Filing

The Loan Asset Mix comprises of four segments as shown below

Source: Company Filing

Having a look at cost of funds, it is consistently declining over the past years.

Source: Company Filing

Other Details

ParticularsDetails
Market Cap (In Rs. Crores)37,357
52-week high/low (In Rs.)162/97.1
CMP (31st January 2022)142
PE2.62x

Shareholding Pattern as of 30th September 2022

ParticularsHolding (%)
Public9.26
Promoters55.99
DIIs17.87
FIIs16.82

Price Performance Vs Nifty50

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