Hold Power Finance Corporation: Sharekhan

Power Finance Corporation (PFC) has delivered healthy profitability over the past several quarters led by a strong loan book and high net interest margin. However, the recent guidelines of the RBI allowing regulatory forbearance for banks on infrastructure financing could increase the competitiveness in the sector going ahead which may affect the company’s growth and margins. The asset quality weakened in Q1FY2015, but it remains healthy with the gross NPA at 1.01% of the total loans. However, going ahead the implementation of various reforms in the power sector would be the key to the asset quality. The provisions will rise due to the provisioning requirement for restructured loans (from 2.75% in FY2015 to 5% by FY2018).” “PFC’s stock price has appreciated significantly (by 86%) since our Viewpoint report on the company on February 5, 2014 due to improved sentiment for the power sector. While the performance of the company remains healthy, further re-rating is contingent upon the implementation of reforms in the infrastructure sector (as reforms would have an impact on its asset quality). Currently, the stock is trading at 1.0x FY2016E book value, which is about 15% discount to its five-year mean valuation. We are neutral on the stock and recommend investors to partially book profit on the stock. Since infrastructure is among the priority areas for the government and positive developments are likely in the sector, long-term investors can continue to hold the stock,” says Sharekhan research report.