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Power Finance Corp needs to sustain asset quality

LiveMint logoLiveMint 28-05-2014 Ravi Krishnan

For a financier which lends exclusively to the beleaguered power sector, Power Finance Corp. Ltd (PFC) has asset quality numbers which would be the envy of every bank in the country. Gross non-performing loans as a proportion of advances stood at 0.65% at the end of March, the same level as a quarter ago.

The second positive in PFC’s March quarter results is the increase in net interest margin (NIM) to 4.99%, up 6 basis points (bps) from a quarter ago. While there was a 13 bps decline in yields sequentially, PFC’s cost of funds slipped by 18 bps. The reduction in surplus liquidity in its balance sheet would also have aided the gain in margins. One basis point is one-hundredth of a percentage point.

Thirdly, PFC reported March quarter disbursements of `16,600 crore, up 13% from a year ago. That propelled its loan book growth to 18%, ahead of analysts’ estimates. This growth in disbursements was led by the generation segment which mopped up `12,202 crore in the March quarter compared with an average of `7,500 crore in the past four quarters.

However, what is worrying is that sanctions continued to decline owing to all-too-familiar problems in the power sector which is derailing fresh investments. In the March quarter, sanctions fell by 42.8% from a year ago. This compares with a 12.6% decline in fresh sanctions for the nine months ended December.

To be sure, PFC has outstanding sanctions of `1.6 trillion. According to the company’s management, that’s enough to drive 18-20% loan book growth for the next couple of years, said a note from Edelweiss Securities Ltd.

The main worry for investors would still be asset quality, given the structural problems in the sector. Some brokerages such as Edelweiss are forecasting that gross bad loans could rise to 2.3% by 2015-16. However, the company is trying to address that by proactively adding to standard asset provisions; it added `180 crore in the March quarter.

Further improvements NIM could come from easing rates, which looks tough for the time being. The hopes of the new government carrying out structural reforms in the power sector continue to rise. PFC would be an immediate beneficiary if that happens. That’s why the stock rose 8.25% on Wednesday. Valuations too are not stretched at 1.33 times estimated book value for FY15.

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