Power Finance Corporation’s (PFC) Q1FY17 PAT of R1,700 crore was higher than estimate on better revenue momentum (up 12% q-o-q). NII was supported by improved NIMs (up 50 bps q-o-q to 4.93%) following unwinding of interest income reversal and lower funding cost, while loan growth was muted (flat y-o-y). While asset quality was broadly stable (marginal rise in GNPLs (R7,550 crore) and restructured book (R33,500 crore), higher slippages from restructured book could deepen challenges.
Despite favourable valuations at 0.8x FY18E P/ABV, near-tomedium term challenges and uncertainties relating to riskier impaired loans could challenge company’s high return profile.
Though implementation of UDAY augurs well for the entire power value chain, it poses risks to PFC’s near to medium term earnings.
While valuations (at 0.8x FY18E P/ABV) are undemanding, uncertainties could challenge the company’s high returns profile and risks surrounding its impaired loans seem to be fairly priced in the stock. Hence, we maintain ‘HOLD/SP’ with target price of R235.
