underperformance had started earlier - as a slowdown in the September quarter - and it would seem that for the last six months, PFC has hit some kind of a wall preventing further growth. In fact, the prime reason why PFC’s FPO is not just a stake sale by Government, but a significant issue of new equity, is this growth obstruction. NBFCs can lend only 25% of their networth to a single company or maximum 40% of its networth to a group of companies. This had prevented PFC’s ability to fund larger power projects of Reliance Power or Tata Power, or to lend more to their parent groups, Reliance Group (formerly Reliance ADAG) or the Tatas. Though the FPO will solve this, and will boost PFC’s loan book in the short-term, whether this will further the downside risks possible on the income and profit front, remains to be seen.
But PFC doesn’t have much of a choice over here - whether to shun or support large power projects as their other kind of customers, the State Electricity Boards, have been alarmingly worsening in health, for some years now. Coming to the core metrics and valuations, PFC comes across as
Satnam Singh, Chairman & Managing Director
an average buy. Its Return on Equity (RoE) of nearly 17% is poorer than other term-lending institutions like IFCI’s 21%, or Rural Electrification Corpo ration’s above 18%. However, PFC’s cash flow position was better than either of them in FY’10. Valuation wise, though PFC’s TTM P/E of 9.43 is reasonable, REC is still cheaper, while IFCI is available at around half of PFC’s valuation. Price-tobook-value wise, PFC is comparable to REC at 2 times, but double that of IFCI’s one times P/BV. All these termlending institutions can look up to the hefty valuations of their peer IDFC, which enjoys a P/E
of 24 and a P/BV of 3, but it is highly unlikely that players like PFC would be re-rated to match IDFC, as it finances a more diversified, faster infra growth over there. All in all, PFC is a same-weight or equal-weight kind of stock, which justifies no rush-investing like in an FPO, but since it is directly coupled with the country’s power sector growth, it can be considered for a 5-10 years time-frame, if picked at the lowest possible price. If the FPO delivers that kind of an attractive price - around Rs. 167 at a P/E of 7.3 times - one can subscribe to this FPO.
Seasonal Magazine
The downside risk shouldn‘t be discarded, as already PFC is suffering from too much concentrated exposure, with 54% of their loan book made up by just 10 borrowers. Despite the hype surrounding large power projects, the ground reality is that these long-gestation projects have upset the calculations of not themselves, but their lenders, and the nation. Reasons are many, including fuel shortage as in the case of coal.