Hold Power Finance; target of Rs 240: Edelweiss

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Edelweiss's research report on Power FinancePower Finance Corporation’s (PFC) Q3FY16 PAT of INR15.8bn (up 2.5% YoY) came in lower than our estimates. The divergence was due to Essar Mahan (INR16bn) and Jas Infra (INR2bn) slipping into NPA and upfronting of standard asset provisioning on restructured assets (to 4.25% from 3.5% at INR2.5bn against requirement to meet it by FY17). Corollary of higher interest income reversal was the 30bps QoQ decline in NIMs, leading to muted revenue momentum (NII down by >2% QoQ). However, controlled opex (down >50% YoY) supported profitability. Disbursements gained traction (up 8% YoY at INR108bn) feeding into 12.5% YoY loan growth. Implementation of project UDAY (wherein the state government will take over debt of SEBs) means lower yields for PFC putting current NIMs under risk. We expect some pressure on growth as well with limited avenues for working capital funding going forward, and slower than expected investment cycle in power sector. Despite favourable valuations at 0.5x FY18E P/ABV, near-to-medium term challenges and riskier impaired loans seem to fairly price the stock. We maintain ‘HOLD’.Though implementation of UDAY potentially augurs well for the entire power value chain, it poses risks to PFC’s near to medium term earnings. We pay heed to undemanding valuations, but uncertainty could challenge PFC’s high returns profile, and risks surrounding its impaired loans (especially on private exposure) seem to fairly price the stock. We maintain ’HOLD/SU’ with TP of INR240. For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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