Power Finance Corporation (PFC) is graduating from its forte of lending to SEBs and moving on to a pioneering role in large private sector projects, extracting fee income from them and increasing exposure to T&D. PFC has thus positioned itself well across the entire power sector value chain. This being the case, power sector investments are accelerating and funding from banks becoming constrained in pockets. We believe a possible new share issue coupled with a slice of government stake sale could act as a trigger since poor liquidity has been a deterrent for some investors.
Loan growth and margins - two key drivers - in the right direction
Loans should increase at a CAGR of 26% during FY10-13E as the buildup of sanctions during FY08-10 was encouraging and conversion rates to disbursements are on the rise. FY11 and FY12 are also the last two years of the current Five-Year Plan, which could see a spike in activity in a back-ended fashion. The company enjoys sufficient pricing power to neutralise funding cost increases due to rising rates, and its recently achieved IFC status will likely enable it to access less expensive foreign currency borrowings more liberally.
Valuation the average of three methods; delays in UMPPs the key risk
We value PFC with the average of the single-stage and two-stage Gordon Growth model and P/E-growth basis. Our target price of INR405 gives ~30% potential upside. The main downside risks are delays in UMPPs, especially as these are much larger than usual projects, and potential dilution of management focus with too many subsidiaries being set up for power related activities.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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