Power Finance Corporation Ltd (PFC) is a commercial enterprise wholly owned by the government of India and was incorporated in 1986 as a development financial institution dedicated to the power sector. Working as a public financial institution its thrust area is to incentives reforms and restructuring of public sector. Range of services offered by it are term loan for power projects, lease financing, renovation and modernization of power plants, bill discounting, energy conversation schemes, working capital loans etc. The organization offers its services in majority of the states throughout the country. The range of consultancy services offered by PFC includes project restructuring and reform activities, analyzing the financial implications of resources, implementation, monitoring effective distribution and management of information and proper communication.
The other financial products that PFC handles are foreign currency term loans, buyer's line of credit, working capital loans, loan to equipment manufacturers, debt restructuring, refinancing, bridge loan, guarantee services etc.
The other financial products that PFC handles are foreign currency term loans, buyer's line of credit, working capital loans, loan to equipment manufacturers, debt restructuring, refinancing, bridge loan, guarantee services etc.
Investment Rationale
• The company has entered into pact with Indian Renewable Energy Development Agency to facilitate financial cooperation in renewable energy sector. At present the installed capacity of electric power from renewable energy sources in India is 10,209 mw. Keeping in view the potential, Ministry of New and Renewable Energy has set for itself a goal to add an additional 14,000 mw capacity of grid quality power through non-conventional renewable resources from commercially exploitable resources by the end of 11th Five Year Plan. This MoU will provide huge opportunity for the company in terms of revenue generation.
• The company is floating an advisory company for leading global investors and Indian power companies. The company will hold 30 per cent in the company while the balance 70 per cent equity will be held by industry professionals. The advisory company will assess the credit – worthiness of power companies and negotiate with global investors for funding upcoming projects of these firms. This will provide autonomy for the company in deciding the borrower’s creditability while granting loans and thereby minimizing the non - performing assets.
• The company plans to raise huge amount totaling to Rs 160 billion in 2008 – 09 via domestic or overseas markets in order to meet the requirements of power projects in India. With the huge capital expenditure plans in pipeline of major power sector companies in next 5 years, this provides ample scope for the company to grab the opportunity by meeting the financing demand of these companies.
• The company has entered into pact with Indian Renewable Energy Development Agency to facilitate financial cooperation in renewable energy sector. At present the installed capacity of electric power from renewable energy sources in India is 10,209 mw. Keeping in view the potential, Ministry of New and Renewable Energy has set for itself a goal to add an additional 14,000 mw capacity of grid quality power through non-conventional renewable resources from commercially exploitable resources by the end of 11th Five Year Plan. This MoU will provide huge opportunity for the company in terms of revenue generation.
• The company is floating an advisory company for leading global investors and Indian power companies. The company will hold 30 per cent in the company while the balance 70 per cent equity will be held by industry professionals. The advisory company will assess the credit – worthiness of power companies and negotiate with global investors for funding upcoming projects of these firms. This will provide autonomy for the company in deciding the borrower’s creditability while granting loans and thereby minimizing the non - performing assets.
• The company plans to raise huge amount totaling to Rs 160 billion in 2008 – 09 via domestic or overseas markets in order to meet the requirements of power projects in India. With the huge capital expenditure plans in pipeline of major power sector companies in next 5 years, this provides ample scope for the company to grab the opportunity by meeting the financing demand of these companies.
FINANCIAL STATEMENT ANALYSIS
The company posted good financial figures for the quarter ended Q3FY08. The net sales for the company rose to Rs 12,921 million for the Q3FY08 as against the net sales of Rs 9,542 million for the Q3FY07 with the growth rate of 35%. The operating profit gone up by 44% to Rs 4,642 million for the Q3FY08 in comparison to the operating profit of Rs 3,231 million in Q3FY07. The operating profit margin for the company stood at 35.92% for the Q3FY08 versus the operating profit margin of 33.86% for the Q3FY07. The EBITDA for the company stood at Rs 4,718 million for the Q3FY08 as against the EBITDA of Rs 3,406 million for the Q3FY07 with the growth rate of 39%. The EBITDA margin for the company stood at 36.51% for the Q3FY08 as against the EBITDA margin of 35.70% for the Q3FY07. The net profit for the company gone up by 38% to Rs 3,205 million in Q3FY08 as against the net profit of Rs 2,327 million in Q3FY07. The net profit margin stood at 24.80% for the Q3FY08 versus the net profit margin of 24.39% for the Q3FY07.
Strong financials
The company is having strong financials despite being a lender to some of the most problematic borrowers in the country – state electricity utilities. The company boasts of a strong balance sheet with NPAs almost non – existent. The company employs different methods to ensure prompt repayment from borrowers such as a rebate for on-time repayment and an escrow mechanism to protect itself from potential default. PFC also directly pays the suppliers of its borrowers rather than route the money through the latter. This ensures that the loan is used for the stated purpose of asset creation and is not used by the borrower for other purposes. The company also closely monitors the financial health of its state-sector borrowers and has the ultimate option of the State government guarantee to encash if the borrowing utility defaults.
Valuation
The company is a unique player in the finance sector that specializes in lending to power projects and also offer non – fund based services. The company mainly lends to thermal and hydro power generation and transmission and distribution projects. It also has a minor exposure to renovation and modernization projects of existing power stations. The company had an exceedingly good results for the quarter ended December 2007 and set for exciting times aheadwith huge investments projected to be made in the power sector in the next five years. The strong balance sheet with almost nil non – performing assets focused business model and lean cost – structure provides huge growth potential for the company. The stock at the current market price of Rs 160 will trade 14.65 times to its earnings and 2.09 times to its book value and is expected to provide huge upside potential in medium to long term. Therefore, we are initiating ‘BUY’ signal on the stock with the target price of Rs 268 which is approximately 60% up from the current market price of Rs 160.
Strong financials
The company is having strong financials despite being a lender to some of the most problematic borrowers in the country – state electricity utilities. The company boasts of a strong balance sheet with NPAs almost non – existent. The company employs different methods to ensure prompt repayment from borrowers such as a rebate for on-time repayment and an escrow mechanism to protect itself from potential default. PFC also directly pays the suppliers of its borrowers rather than route the money through the latter. This ensures that the loan is used for the stated purpose of asset creation and is not used by the borrower for other purposes. The company also closely monitors the financial health of its state-sector borrowers and has the ultimate option of the State government guarantee to encash if the borrowing utility defaults.
Valuation
The company is a unique player in the finance sector that specializes in lending to power projects and also offer non – fund based services. The company mainly lends to thermal and hydro power generation and transmission and distribution projects. It also has a minor exposure to renovation and modernization projects of existing power stations. The company had an exceedingly good results for the quarter ended December 2007 and set for exciting times aheadwith huge investments projected to be made in the power sector in the next five years. The strong balance sheet with almost nil non – performing assets focused business model and lean cost – structure provides huge growth potential for the company. The stock at the current market price of Rs 160 will trade 14.65 times to its earnings and 2.09 times to its book value and is expected to provide huge upside potential in medium to long term. Therefore, we are initiating ‘BUY’ signal on the stock with the target price of Rs 268 which is approximately 60% up from the current market price of Rs 160.
By HEM Securities
