Investment Shastra

Power Finance Corporation FPO at price band of Rs. 193-203: Does it provide a good investment opportunity?

Power Finance FPO Details of issue price, size, price bad, open and close date

Market View of Power Finance Corporation Stock Price (11th May’11):

Latest Stock Price: Rs. 217

52 Week-High Stock Price: Rs. 383

52 Week Low Stock Price: Rs. 205.75

Latest P/BV: 1.67

So, what is the subscription offer? Here is the review of Power Finance Corporation FPO

Power Finance Corporation, a ‘Nav Ratna’ company dedicated to providing finance for the power sector is coming out with a FPO of 22,95,53,340 equity shares of Rs. 10 each, The issue consists of a fresh issue of 17,21,65,005 shares by the company and an offer for sale of 5,73,88,335 shares by the President of India (i.e. dilution of 5% stake by the Government of India). The Government’s holding in the company will be reduced to 73.72% post FPO from 89.78%. With this disinvestment, which is Government’s first disinvestment for FY12, the Government would cross Rs. 1 Lakh Crore milestone from all its assets sales till date.
The price band for the issue has been fixed at Rs. 193 – Rs. 203. At the upper end of the band, the issue will help the company raise around Rs. 4660 Cr.

Retail investors will get a 5% discount on final IPO price. So, the effective retail price for them will be Rs. 193, if the issue is fixed on the upper price band.

Use of Proceeds:

PFC is raising funds for augmenting capital base to ensure compliance with requisite capital adequacy norms and to meet future capital requirements arising out of the growth in business, and to fulfil general corporate purposes.

Tell me about Power Finance Corporation…

The ‘Nav-Ratna’ Status Power Finance Corporation (PFC) was set up in 1986 by the Government to provide finance to the power and associated sectors. Its product line includes various fund and non-fund based assistance. The fund-based assistance includes project finance, short-term loans, buyer’s line of credit, debt refinancing schemes, etc. and the non-fund-based assistance includes default payment guarantees, letters of comfort etc.

It also provides various fee-based technical advisory and consultancy services for power sector projects. Besides, the Company also looks for exploiting opportunities in the area of consortium lending, lending to capital equipment manufacturers, fuel supply projects and related infrastructure projects. PFC was classified as an ‘Infrastructure Finance Company’ in July, 2010 which enabled the entity to mop up funds through issue of tax-free infrastructure bonds.

How has the performance of Power Finance Corporation been?

Historical Financial Performance:

PFC has reported a good y-o-y growth in all its parameters in the past, except during the period FY05-07. After its IPO in 2007, the company has reported robust growth in all its parameters. Over the last 10 years, its total operating income has grown by 17.45%; which indicates a robust growth in interest income as more than 90% of the company’s operational income comes from the interest earned on loans. ,During the same period its EPS has grown by 14.23%, and BVPS by 10.93%. The Company’s total loan assets has increased from Rs. 35581.91 Cr. as on 31st March, 2006 to Rs. 79855.75 Cr. as on 31st March, 2010 – at a CAGR of 22.4%. Its loan assets have further increased to Rs. 92118.25 Cr. as on 31st December, 2010. The increasing loan assets shows that the Company has been expanding its business significantly in the past. PFC’s Net Profit to Total Fund ratio has been above 2% over the last 10 years; this shows efficient utilization of funds by the management of the Company.
Click the image below to have a look at the 10 year financial performance of the company.

Good Asset Quality as a result of decreasing NPAs and high Capital Adequacy Ratio:

Over the years PFC has been able to reduce its NPA (Non Performing Assets) levels. For years ending 31st March, 2008, 2009, 2010, the NPA levels of PFC were 0.03%, 0.02% and 0.02% respectively. As on 31st December, 2010, the level of Net Non Performing Assets has been recorded at Rs. 13.16 crore, which represented 0.01% of the Loan Assets. This indicates that the company has negligible non-performing assets, and so the quality of the assets of the company is good.

The Capital Adequacy Ratio of the company as on 31st December, 2010 is 17.3% which is a positive for the Company as the mandatory capital adequacy requirement for infrastructure companies is 15%. The FPO is expected to further improve the Company’s Capital Adequacy Ratio to 22%.

Q4FY2011 and FY2011 performance:

Flat profit growth despite good growth in total income in March’11 quarter – The company’s total income increased by 25.8% to Rs. 2617.34 Cr. Despite this good growth, PFC’s net profit growth has been flat in the fourth quarter – Rs. 606.75 Cr. in Q4 FY11 as compared to Rs. 600.77 Cr. in Q4 FY10. This is mainly due to a 30% rise in interest cost and a higher tax outflow.

As per the Un-audited results, the Company has posted a growth of 11.1% in its net profit, Rs. 2618.79 Cr. for FY11 as compared to Rs. 2357.24 Cr. for FY10. Total Income has risen by 26.57%, from Rs. 8002.09 Cr. to Rs. 10128.48 cr.

What can we expect in the future? Here is the analysis

Quarters Ahead –

Pressure on Margins in the coming quarters due to increasing rates:

PFC is going to face declining margins in the coming quarters because of rising interest rates, indicated by the recent 50 basis points hike in the repo rate by the Reserve Bank of India. The rising rates are expected to increase its overall cost. Hence, in the coming quarters, the Company may experience declining margins.

In the Long-term-

Power Sector is expected to have a bright future in India:

The Indian Power Sector is one of the largest and most important industries in India. India has always been a Power deficient country. Over the years, the demand for power has always been greater than its supply. This power deficit is expected to continue in future because India is an emerging economy characterised by rapid urbanization and industrialization. The rising population of India will also lead to rise in the demand for power. Huge capacity additions are required in India to meet the ever rising demand for power. Hence, going forward, the investment opportunities are huge in this Sector, thus benefitting Power Finance Corporation.

Click the image below to view India’s power generation capacity and India’s status in the world –

Power Finance Corporation, power generation capacity

Under Government’s ‘Power for all by 2012’ mission, it has targeted per capita consumption of 1000 kWh by the end of the 11th Five Year Plan (2007-2012) as compared to levels of 734 kWh in 2008-09, which demands huge capacity additions. Hence, huge investments are required in the power sector which is a good sign for power financing companies like PFC.

High funding requirement from the Power Sector:

Considering the huge demand for power in India and requisite investments required in Generation, Transmission, Distribution and Renovation and Modernization; and in Government initiatives, the funding requirements are huge. The funding requirement of Power Sector in the 11th five year plan has been estimated to be about Rs. 10.59 Lakh Cr. which includes Rs. 4.24 Lakh Cr. as debt and Rs. 2.14 Lakh Cr.  as equity thus leaving a funding gap of Rs. 4.21 Lakh Cr. which is required particularly to complete the transmission and Distribution projects. For 12th plan period, fund requirement is estimated to be about Rs. 11 Lakh Cr. for estimated capacity generation of 1,00,000 MW.  This huge requirement of funds indicates the future opportunities for Power Financing sector including the Power Finance Corporation.

PFC plays a strategic role in Government initiatives:

The Company plays a strategic role in Government’s initiatives for the development of the power sector in India.

  • PFC has been designated as the nodal agency for implementation of various power schemes as well as Ultra Mega Power Projects (UMPP) each costing around Rs. 16,000 crore. This enables the company to undertake all activities necessary to obtain the appropriate clearances required to establish the UMPPs for a fee. Four UMPPs have already been awarded to successful bidders. With PFC being closely associated with the passage of these projects, there is also possibility to lend to these projects.
  • PFC has also been designated as the nodal agency to operationalise the R-APDRP (Restructured – Accelerated Power Development and Reform Programme) programme and it shall act as a single window service. As a nodal agency, PFC shall receive a fee as well as the reimbursement of expenditure in implementation of the programme as per the norms to be decided by the R-APDRP Steering Committee.
  • Considering the huge demand for power, the Government of India encourages private participation in this sector. Private players look to take advantage of the opportunities available in this sector. Private participation is expected to increase in the coming years, which leaves PFC with more companies to lend to.

Company’s IFC Status:

The company is registered with the RBI as an NBFC and has also been classified as an Infrastructure Finance Company (IFC) in 2010. This enables it to be operationally more flexible than some of its competitors and effectively capitalize on available financing opportunities. As an NBFC, PFC is governed by regulations and policies that are generally less stringent than those applicable to commercial banks, including with respect to liquidity requirements and the requirement to hold a significant portion of funds in relatively low yield assets, such as government and other approved securities and cash reserves.

Power Finance Corporation is trying to get banking license. If the company gets banking license, it can reduce its cost of funds significantly and earn high margins

But, what are the concerns?

  • PFC is facing stiff competition from Banks. Interest spread of the banks is higher than PFC, even though yield on assets are higher in cases of PFC. The main reason is that banks have access to cheaper source of funds in the form of CASA (current accounts & saving accounts), which is not the case with PFC as it does not accept deposits.
  • Inherent risks involved in Power Projects are high due to long gestation period of power projects. The various risks involved are credit risk, market risk, poor financial health of power sector utilities, regulatory restrictions, etc. As more than 95% of Company’s income comes from Interest income, the volatility in interest rates affects company’s lending operations and profitability.
  • PFC’s loan book is very concentrated. Only 10 borrowers consist of 54% of loan book.
  • PFC, being an NBFC, cannot lend more than 25% of its net worth to a single company or 40% of its net worth to a group of companies. This prevents PFC to fully fund very large power projects.

So, should I invest in PFC’s FPO

The future outlook of the power sector is quite good considering the rising demand for power in India and the various initiatives taken by the Government of India for the power sector. To meet the rising demand for power and to achieve requisite capacity additions, huge investments are required in the power sector. Power Finance Corporation with its experience and expertise in the power sector is expected to benefit from positive outlook of this sector.

The price band for this public issue has been fixed at Rs.193-203 per share. But, does this price offer an attractive discount to its right value (MRP) or is it over-priced? It is always best to invest at an attractive discount to the MRP, to get maximum returns at minimum risk. Become a member of to know its sensible buy-price and hence take the right action for this FPO.

Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions.

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  • Great learning here. Thanks.

    Is it possible to create a series of checklists for various industries and link to it at the beginning of the article. I am hoping such an approach would not help amateur investors like me to understand a new industry but also help you to organize your reports/ blog posts in a consistent structure.

    An idea of how a check list can be created:
    What are the success factors in this industry/ business? (Here it is a NBFC)
    – Ability to raise funds for cheap and lend it at higher interest rates
    – Keep Non-Performing Assets (NPA) low
    – Minimize credit risk through diversifying the loan portfolio
    – Establishing a more branches and geographical spread can help in reaching more customers while also diversifying geographical risk.
    – Availability of large funds can help service bigger clients leading to bigger margins
    – Experienced management with good financial skills and industry expertise to manage the funds efficiently and also get future orders

    What are the key risks for the industry and the company in particular?
    – High interest rates limit the ability of a company to raise funds cheaply, implies affecting profit margin
    – Creditors may not repay loans resulting in higher NPA, implies lesser profits and lesser funds to loan out again
    – Too few creditors borrowing huge amounts of money resulting in concentration risk. If they fail to repay it can hurt the company

    What are the red flags in the industry?
    – Poor margins despite high loans implies poor NPA, longer debtor days, unskillful management of cash on hand etc.
    – High margins but little or no dividends – shareholder-unfriendly management who probably pay high perks to themselves
    – Not expanding branches implies diversification risk
    – Management with close relationships with the Govt. implies if the Govt. changes, the orders may dry up.

    My 2 cents… hope I didn’t bore you 🙂

  • I agree with you they also have to prepare report on the industry or sector wise
    like most profitable anfd future multi bagger etc.
    maqbool ahmed

  • Hi,
    @madhavshivpuri:disqus  and @7d4e78e6b093ba5b1d605c1643b2cc3a:disqus  –  Regarding your request for a checklist for each industry/sector; while analyzing a sector/industry, we follow a certain framework like the growth drivers, Porters 5 Forces analysis etc, which helps us do a thorough and detailed analysis and hence give a complete picture of the whole sector .

    Yes, you are absolutely right about linking the company Shastra/FPO/IPO articles to our industry analysis which will help the readers understand better, which we do whenever appropriate.

    @1e2e3ce1d058800fcd40c943490e91a2:disqus  – We have been writing our analysis on sectors/industries, where we mention the growth future prospects of the sector/industry. You can go through these few industries which we have analysed – The Indian IT sector – Driving the India Growth Story. –
    Indian Pharmaceutical Sector – Shifting from a defensive to a growth sector –

    We have also written an analysis on banking sector, where we have explained the critical parameters to be kept in mind while analyzing banking stocks.
    Here it is You will find it an interesting read.

  • Can you please advice what is the difference between purchasing the PFC stock from the open market and buying in the FPO? Is it the case that the FPO is 5% discount to the market price for the retail investor and so has immediate benefit?

    On a separate note, when companies raise funds in various forms – notes, debentures, FPO, warranty, stock options, etc., there are are probably many many ways in which they are done. As a (amateur) investor it is quite difficult to evaluate the pros and cons of such mgmt choices. Can you pls shed some light on that?