This Navratna PSU Stock Has Potential To Gain 60%, Buy For Target Price Of Rs 191: ICICI Securities

Stock Outlook & Returns

PFC's stock today closed at Rs 120.10 apiece, after falling 0.66%. The 52 week low of the stock is Rs 97.10 and 52 week high is Rs 153.75. It has a market cap of Rs 31,707 crore. The ROE is Rs 19.55%.

Over the 1 week, the shares gained 2.04%. In the past 1 & 3 months, the shares gained 11.83% and 13.62%, respectively. Stocks over the 1 year, the shares declined 9.15%. In the past 3 & 5 years, the shares gave a positive return of 9.48% and 1.35%, respectively. 

Disbursements muted; loan portfolio flat QoQ and YoY

In a seasonally slow Q1, disbursement momentum was muted - down 59% YoY (even on a low base) and 72% QoQ at Rs46.4bn (<10% of FY22 disbursements). As a result, loanbook was flat QoQ/YoY at Rs3.70trn. However, sanction pipeline was strong at Rs 253.9bn during the quarter (including Rs21.5bn to Damodar Valley Corporation, Rs18bn to Maharashtra State Generation Company, and Rs14.8bn to Himachal Pradesh Power Corporation, among others), which should support loan growth in the coming quarters. On 3rd Jun'22, the ministry of power notified the Electricity (Late Payment Surcharge and Related Matters) Rules, 2022.

PFC, in Jul'22, sanctioned Rs330.8bn and disbursed Rs 13.4bn to discoms for clearance of dues under the LPS Rules. Company is also exploring opportunities to provide financing for electro-mechanical components of projects in 'other infra' sector (such as metro's, ports and airports).

Hence, as disbursements pick up going forward, loan asset growth is envisaged to gather pace, gradually. "We are building-in loan growth of 2% / 6% for the company in FY23E / FY24E. Slower than anticipated demand pick-up in project financing and liquidity schemes may result in correspondingly slow loan growth," the brokerage said.

Stage-3 flat; three projects in advance stages of resolution

Gross stage-3 assets were flat QoQ at Rs209bn, while coverage ratio improved 77bps QoQ to 69.4%. Currently, 23 stressed projects are in stage-3. Of this, 14 projects of Rs153.4bn are being resolved through NCLT and the remaining 9 projects of Rs55.8bn are being resolved outside NCLT. Of the 23 projects, 3 projects with outstanding of Rs 44.0bn are in advanced stages of resolution (including South East UP Transmission - Rs22.6bn, Jhabua Power - Rs7.6bn, Ind Bharath Utkal - Rs13.7bn). Strengthening the balance sheet, PFC has further inched up provisioning coverage to 69.4% from 68.6% QoQ / 65.0% YoY on stage-3 assets. Despite increasing coverage, credit cost came in at Rs1.7bn (~20bps). Detailed accountby-account analysis suggests credit cost of 0.7% / 0.6% for FY23E / FY24E, respectively. Higher haircut with delayed resolution may pose risk to our credit cost estimates.

Yields retrace from 6-year low, which aided margin expansion

During FY22, PFC reduced interest rates by 75-200bps resulting in decline in yields. Yield on advances for Q1FY23 rose 11bps QoQ to 10.01% from 6-year low yields of 9.90% in Q4FY22. Cost of funds also rose 3bps to 7.08% from 7.05% QoQ. As a result, spreads expanded by 8bps QoQ to 2.82% while margins improved by 14bps QoQ to 3.69%. Thus net interest income was up 3% QoQ, but down 2% YoY. Heightened competition from banks, coupled with moderate demand, will result in flat margins in the coming quarters.

CRAR improves above 14%; announced interim dividend of Rs2.25 per share (Rs12 for FY22)

PFC has been focusing on building an adequate capital buffer. CRAR increased by 85bps QoQ and 317bps YoY to 24.33% with tier-I capital at 20.95% (20.00%/19.07%/18.42%/17.56% in Q4/Q3/Q2/Q1FY22) and tier-II at 3.38% (3.48% QoQ). Company announced dividend of Rs2.25/share in Q1FY23 (vs Rs12/share in FY222) on EPS of Rs7.99 per share, which is equal to ~28% payout. "We believe PFC will continue with its policy of declaring dividend equivalent to 30% of earnings, or 5% of net worth, whichever is higher," the brokerage said. 

Creation of Power Asset Management Company (PAMC) for taking over the stressed/NPA power assets

PFC's board has approved creation of Power Asset Management Company (PAMC) for taking over the stressed/NPA power assets. The creation of PAMC is subject to further approval from ministry of power and other authorities. PAMC will be a joint venture between PFC and REC with equal share of 50:50 and run as a professional organization which will have the expertise to acquire such stressed power assets, operate, maintain and to complete them wherever required. Acquisition of common stressed assets by PAMC, where both REC and PFC have exposure, will have synergistic effect due to pooling of resources. Given that larger part of the stress is recognised and provided for, this will be a step in the right direction for offloading chunky stressed assets from its balance sheet and for effective and speedy resolution.

ICICI Securities Recommends Buy For A Target Price of Rs 191

PFC's Q1FY23 earnings, as anticipated, registered a decline of 7% QoQ / 19% YoY to Rs21.1bn. Elevated net forex loss at Rs7.7bn (vs Rs5.1bn in Q4FY22 / Rs3.7bn in Q1FY22 / Rs9bn in full-year FY22) due to INR depreciation and nil dividend income weighed on earnings. Nonetheless, 8bps QoQ spread expansion aided by 11bps QoQ rise in yields surprised positively. Credit cost at Rs1.7bn (<20bps) too was lower than our estimate of Rs5bn.

Disbursements were muted and loan portfolio stayed flat, both QoQ and YoY. However, sanction pipeline revives hope on growth gathering pace gradually. Stage-3 was flat QoQ with no slippages or resolution. Three projects with outstanding of Rs44bn are in advanced stages of resolution of assets with potential to get stage-3 below 5%. Also, the company in joint venture with its subsidiary, REC, has proposed creation of a power AMC to take over and resolve common stress / NPA power projects. Power Finance Corporation has announced an interim dividend of Rs2.25/share, translating to ~28% dividend payout. Maintain BUY with an unchanged target price of Rs 191 (0.8x FY24E P/ABV).