Investment Idea: PFC

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.

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.

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.

By HEM Securities

Stock Ideas

HDFC Securities has maintained a buy rating on Tanla Solutions target price of Rs 1074. "Tanla has consistently offered excellent quarterly results and hence it remains our top pick in Mid cap IT services. We believe, with the recent fall in the equity market, the stock is looking very attractive because it faces little risk from slowing industrial spending. Tanla trades at 14x and 9x its FY08E and FY09E EPS of Rs 31.93 and Rs 48.50 respectively".
"Our target price of Rs 1074 (potential upside of 144%) includes Rs 992 for the core business (target multiple of 23x its core earnings of Rs 42.90 per share FY09E) and Rs 82 for its non-core business (interest and dividend incomes). We maintain a BUY rating on Tanla Solutions" says HDFC Securities.

Kotak securities has maintained a buy rating on Nitin Fire Protection price target of Rs 650. "For FY08E, we now expect Nitin Fire Protection (NFPIL) to report revenues of Rs 1.4 billion, EBIDTA margins of 18.4% and PAT of Rs 203 million. Consequently, we expect the company to report lower EPS of Rs 16.1 as against our earlier estimate of Rs 20.1. However, we maintain our FY09E earnings estimates and expect NFPIL to report EPS of Rs 41.0 in FY09E. This is primarily because the plant has now stabilized. Thus, its FY09E numbers would not be impacted".
"We believe the current valuations are very attractive considering the clear growth prospects of the company, going forward. This is due to the strong order book for its CNG cylinders business. This would lead to 99.0% CAGR in revenues and 129.8% CAGR in net profits from FY07 to FY09E. We continue to recommend BUY with an unchanged price target of Rs 650" says Kotak securities .

Markets Today

The market surged in late trade ending with decent gains shrugging off subdued to weak trend in Asian and European markets. It had edged lower at the onset of the trading session tracking subdued-to-weak trend in Asian markets before bouncing back shortly. Banking stocks surged in late trade. Power stocks rose. Realty and IT stocks declined. Capital goods stocks rose on reports Finance Minister P Chidambaram met representatives from auto and capital goods industries to discuss industrial slowdown after recent weak Index of Industrial Production (IIP) numbers.
HDFC Bank and HDFC were major gainers from Sensex pack. The market breadth was strong. Buying was witnessed in select mid-cap and small-cap stocks.
Asian and European stocks edged lower after Washington Mutual Inc, the largest US savings and loan firm, said on Tuesday, 8 April 2008, it expected a large quarterly loss and minutes from the Federal Reserve's latest meeting showed some of the central bankers saw the possibility of a prolonged and severe US economic downturn.
The 30-share BSE Sensex provisionally ended up 234.32 points or 1.5% at 15,821.94. At the days high of 15,829.59, Sensex gained 241.97 points in late trade. At the days low of 15,464.72, Sensex lost 122.9 points in early trade.
The BSE clocked a turnover of Rs 5,294 crore today 9 April 2008 compared to a turnover of Rs 5,145.99 on 8 April 2008.
The broader based S&P CNX Nifty was up 44.55 points or 0.19% at 4,754.20 as per provisional figures.
The market breadth was strong: on BSE 1819 shares advanced as compared to 811 that declined. 58 shares remained unchanged.
The BSE Mid-Cap index up 1.39% to Rs 6,471.88 and BSE Small-Cap index up 1.68% to 7,945.36.
Banking stocks surged in late trade. ICICI Bank (up 3.44% to Rs 841.20) and HDFC Bank (up 6.65% to Rs 1,391) edged higher. India's largest commercial bank State Bank of India rose 1.33% to Rs 1,697. It has reportedly shortlisted three potential partners, including Insurance Australia Group, for a general insurance venture. The other two shortlisted partners are a German firm and a US-based firm, the reports suggested.
Capital goods stocks rose. Larsen & Toubro (up 2.55% to Rs 2,647), Bharat Heavy Electricals (up 4.1% to Rs 1,783) and Suzlon Energy (up 4.25% to Rs 302.05) edged higher. As per reports, the finance ministry is looking at various measures to provide a boost to the capital goods sector, which witnessed a sharp slowdown in growth earlier this year. Finance Minister P Chidambaram today held a meeting with chief executives of several leading public sector and private companies in the sector including the likes of NPTC, Bhel, BEML and L&T among others. In January this year, the Index of Industrial Production (IIP) numbers showed a significant slowdown in the capital goods sector, with growth in the sector falling sharply from over 16% in December 2007, to just 2.1% in January 2008.
Power stocks rose. Reliance Power (up 3.1% to Rs 362.25), Reliance Energy (up 2.3% to Rs 1,176.90), NTPC (up 0.62% to Rs 187.70), Tata Power Company (up 4.84% to Rs 1,188.80) edged higher. The Finance Ministry has cleared a restructured Rs 50,000-crore accelerated power development and reforms programme (APDRP), which would soon be sent to the cabinet for approval.
IT majors declined. Tata Consultancy Services (down 0.98% to Rs 876.65), Wipro (down 0.56% to Rs 411.70) and Satyam Computer Services (down 0.37% to Rs 427.50) edged lower. However, Indias second largest IT exporter by sales Infosys rose 1.27% to Rs 1,479.90.
Realty stocks declined. Indiabulls Real Estate (down 3.33% to Rs 479.80), Housing Development Infrastructure (down 2.02% to Rs 639.50), Unitech (down 2.23% to Rs 263.35) and DLF (down 0.91% to Rs 610) edged lower.
India's biggest FMCG firm by sales Hindustan Unilever (HUL) declined 1.39% to Rs 244.45. It has reportedly cut prices of three of its soap brandsLux, Hamam and Rexona. The price reduction by HUL is being termed as a post-budget measure to please consumers, the reports added.
Indias largest private sector company in terms of market capitalisation and oil refiner Reliance Industries rose 1.55% to Rs 2,418.05.
Jaiprakash Associates (down 1.44% to Rs 218.35), ITC (down 1.2% to Rs 205.80), Ranbaxy Laboratories (down 1.78% to Rs 462.35), Reliance Communications (down 1.71% to Rs 492), Satyam Computer Services (down 1.67% to Rs 421.90), Maruti Suzuki India (down 1.65% to Rs 731.90), Bharti Airtel ( down 1.44% to Rs 816.65) edged lower from the Sensex pack.
HDFC (up 4.83% to Rs 2,421), Tata Steel (up 3.44% to Rs 678.90), Ambuja Cements (up 1.82% to Rs 120.20), Hindalco Industries (up 1.38% to Rs 172.65) and Cipla (up 2.42% to Rs 217.60) edged higher from Sensex pack.
The next major trigger for the market is Q4 March 2008 results of India Inc. Analysts will be closely watching what the company managements have to say about the outlook for the year ending March 2009 (FY 2009). Analysts will also scrutinize disclosures that companies may make regarding foreign exchange derivatives products that they have bought on the advice of their bankers. A steep decline in the value of the US dollar against the Japanese Yen and the Swiss Franc hit Indian corporates which have used these two currencies (Yen and Franc) extensively to swap their rupee denominated debt.
Good results are expected from the telecom sector on the back of strong growth in new subscribers additions. Infrastructure and engineering firms, too, are seen reporting decent numbers in Q4 March 2008 on the back of healthy order book positions. The performance of auto firms is likely to be sluggish due to muted volume growth and rise in input costs.
A depreciation of the rupee against the dollar is likely to drive good results from the IT sector on a sequential basis in Q4 March 2008 over Q3 December 2007, though the focus here is on guidance for the year ending March 2009 from IT bellwether Infosys Technologies. Infosys guidance will give investors a sense of the effect of the weakening US economy on technology spending by companies there. Infosys unveils Q4 results on Tuesday, 15 April 2008.
Prospects of further outflow by foreign funds to offset losses incurred by them in the US sub-prime mortgage market continue to weight on the market sentiment. In the calendar year so far, FIIs sold shares worth a net Rs 11808.70 crore (till 4 April 2008), to offset their huge losses in the US sub-prime mortgage market. As per provisional data, FIIs bought shares worth a net Rs 7.27 crore on Tuesday, 8 April 2008.
As far as domestic liquidity is concerned, inflows to equity mutual funds and unit linked insurance plans (with high weightage for equity) have slowed after the sharp setback on the bourses in the past two months. As per provisional data, domestic funds bought shares worth a net Rs 447.79 crore on Tuesday, 8 April 2008.
European markets were subdued. Frances CAC 40, Germanys DAX and UKs FTSE 100 were down between 0.31% to 0.78%. In Asia, key benchmark indices in Hong Kong, China, Japan, and Singapore were down by between 0.06% to 5.5%.
Source: Capital Market

Intraday Calls for 9th April

Markets may open flat to positive and may see a good rally today.

Today's Intraday Picks:

REL (Reliance Energy)
HDIL
UNITECH
BANK OF BARODA
KPIT

For Levels and Targets download the file by CLICK HERE.

Others: Bank of Rajasthan, Dish TV, Alembic Pharma.
Good Luck