>Power Finance Corporation (RELIGARE SECURITIES)

● Strong traction in loan sanctions: In light of India’s rising energy deficit and inadequate T&D infrastructure, we expect large investments in the power sector during the 11th and 12th Five Year Plans. With more than 20 years of experience in lending to the power sector, Power Finance Corporation (PFC) is wellpositioned to leverage the growing financing opportunities. The company has witnessed strong traction in loan sanctions over the last few years and currently has outstanding sanctions of Rs 1.1tn. A large proportion of these will be disbursed over FY10-FY12 which provides strong growth visibility. We expect PFC to clock a 19% CAGR in loan disbursals over FY08-FY10 and consequently a 22% CAGR in its loan book to Rs 772bn by FY10.

● Margins to remain largely intact: In a rising interest rate scenario, PFC has benefited from re-pricing benefits on its loan assets (80% of which have a reset clause of three, five or ten years) and the fixed nature of its liabilities (90% fixed). With the recent decline in interest rate, PFC’s incremental spreads now stand at 3–4% which will help in maintaining spreads of ~2.3–2.4% for FY10. However, interest margins may come under pressure from FY11 onwards when loans disbursed in FY08 and FY09 will be due for re-pricing. Access to tax-free bonds, if allowed by the government, will help PFC to maintain its interest spreads. We are not factoring in this possibility at present.

● Robust asset quality: PFC’s asset quality has remained robust with net NPAs hovering at near-zero levels. Loans to state and central sector utilities comprise ~88% of the total loan book. Moreover, loan to utilities have an escrow mechanism in place which provides further comfort on the asset quality front. Significant T&D losses and lower realisations have weakened the financial
position of state utilities; however, losses have remained under control in the past few years and the subsidy burden as a percentage of state government revenues has declined significantly.

● Favourable tax ruling to act as catalyst: PFC is eligible for tax exemption up to 20% of the profit derived from the financing business. However, it is providing for tax on this deduction by creating a deferred tax liability due to objections from the auditors in FY05. This issue is under consideration with the ICAI; if the outcome proves favourable for PFC, the company’s tax rates for future years will be lower and its net worth will increase by ~Rs 13bn–14bn.

To see full report: PFC