Company Report | FPO Note
LONG TERM INVESTMENT CALL
Issue Details
Issue Opens
Issue Closes
Price Band (INR/Share)
Face Value (INR/Share)
No of Equity Shares (Mn)
Size of the Issue (INR mn)
Source: RHP, Unicon Research
Shareholding Pattern (%)
Group
Promoters & Promoter Group
Others
Total
Source: RHP, Unicon Research, * assuming fully subscribed at
upper band
Objects of the issue
• augment our capital base to ensure compliance
with requisite capital adequacy norms and to
meet our future capital requirements arising out
of growth in our business; and
• general corporate purposes.
Financial Summary
Income
EBIDTA
PAT
* Source: RHP, Unicon Research
Analyst
Shweta Rane | srane@uniconindia.in
Wealth Research, Unicon Financial Intermediaries. Pvt Ltd.
Email: wealthresearch@uniconindia.in
11 May 2011 SUBSCRIBE
Power Finance Corporation Ltd (PFC) is a leading financial institution
May 10, 2011 focused on the power sector. It is registered with the RBI as a non-deposit
taking Non Banking Financial Company (NBFC) and was classified as an
May 13, 2011
Infrastructure Finance Company (IFC) in July 2010. Its IFC classification
203-193
enables it to effectively capitalize on available financing opportunities in
10
the power sector in India.
1319
46599/44303 Investment Rationale
Established track record & consistent financial performance
Established track record of consistent financial performance and growth
enables PFC to capitalize attractive financing opportunities in the power
sector. Total loan assets increased from INR 355,819 Mn in FY06 to INR
Pre Post 921,182 Mn in Q3FY11. In addition, its loan asset portfolio has increasingly
IPO IPO* become diversified interms of sector and customer base. Net Interest
89.8 73.7 Margin was 4% and 3.5% in FY10 and in Q4FY11 respectively. Consistently
10.2 26.3 it has maintained the gross & net NPA levels at 0.03% & 0.02% respectively.
100 100 Power sector to drive growth
Power sector, a key infrastructure area, is perceived as the main driver of
India's higher economic growth. The 11th Plan (2007-12) targeted 78,700
MW installed power generation capacity addition, and the 12th Plan (2012-
17) aims at adding 1,00,000 MW. Ultra Mega Power Projects (UMPPs)
would result in significant generation capacity addition. This would
provide company with good financing opportunities to fund projects with a
long gestation period.
Strong domain expertise & relationships with power sector participants
PFC playing a strategic role in, the GoI’s initiatives, has developed strong
(INR mn) relationships with the Central and State governments, various regulatory
FY10 9MFY11 authorities. Its industry expertise enables it to access risk & develop
80,817 74,978 capabilities in loan disbursement area. This would increase the business
30,314 26,385 opportunites for PFC.
22,289 19,403 Operational flexibility to capitalize on both fundraising and lending
opportunities
PFC is registered as an NBFC and has also been classified as an IFC. It’s
NBFC and IFC classification enables it to be operationally more flexible
than some of its competitors and effectively capitalize on available
financing opportunities.
Concerns
Managing asset quality to be a challenge for PFC, as its loan portfolio is
largely concentrated to certain borrowers which are historically loss-
making.
Outlook & Valuation
Going ahead, power sector outlook remains strong due to huge demand-
supply gap. This augurs well for power finance companies with strong
domain expertise & relationships with government & private bodies. The
stock is being offered at 1.1x and 1.2x of its current book value at the upper
and lower price bands respectively, which is cheaper to its peers. At the
upper band stock is offered at 6% discout to its CMP. Looking at
tremendous growth prospects in the power sector and diversified portfolio
of PFC, we recommend subscribing to the issue.
 Company Background
Power Finance Corporation Ltd (PFC) is a leading financial institution in India
focused on the power sector. PFC was incorporated with an objective to provide
financial resources and encourage flow of investments to the power and associated
sectors, to work as a catalyst to bring about institutional improvements in
streamlining the functions of its borrowers in financial, technical and managerial
areas to ensure optimum utilization of available resources and to mobilize various
resources from domestic and international sources at competitive rates. In addition, it
is involved in various GoI programs for the power sector, including acting as the
nodal agency for the UMPP program and the R-APDP and as a bid process
coordinator for the ITP scheme. It is registered with the RBI as a non-deposit taking
systemically important Non Banking Financial Company (NBFC) and was classified
as an Infrastructure Finance Company (IFC) in July 2010. Its IFC classification enables
it to effectively capitalize on available financing opportunities in the power sector in
India.

About the Industry

India is the fifth largest economy in terms of purchasing power parity with the GDP
of USD 1,377 bn. The rapid growth of the economy places a heavy demand on electric
power. The consumption of electricity in India is very low as compared to other
economies like USA and China. This presents significant potential for sustainable
growth in the demand for electric power in India. The total energy consumption in
India is estimated to show a CAGR growth of 3.5% over the next 25-30 years,
reflecting the huge potential for investments in the energy sector in India.

The power sector has consistently failed to meet the targets set in the last three 5 year
plans. The latest revised target capacity addition for the 11th Plan is 78,700 MW
(56.7% of which had been achieved as of March 31, 2011) and this is expected to result
in significant investments in the power generation sector. The total fund requirement
to achieve the 11th Plan target was estimated as INR 10,316 bn. A tentative capacity
addition of approximately 100,000 MW has been envisaged for the 12th Plan.

To deliver a sustained economic growth rate of 8%, India needs, at the least, to
increase its primary energy supply between three and four times and its electricity
generation capacity between five and six times based on FY04 levels. Such investment
in power generation will require increased investment in power transmission and
distribution if the additional power is to be effectively disseminated among potential
customers.

Power sector is mainly controlled by the private sector. The government has realized
the importance of private sector participation. Electricity act 2003 and the National
Tariff Policy of 2006 are among the reforms introduced by the government to
encourage the participation of private sector. Unbundling of SEBs, tax benefits,
Accelerated Power Development and Reform Program (APDRP) for distribution,
permission for trading of power etc. are among others.

Wealth Research, Unicon Financial Intermediaries. Pvt Ltd.

Email: wealthresearch@uniconindia.in
 Investment Rationale
Established track record & consistent financial performance
Established track record of consistent financial performance and growth enables PFC
to capitalize attractive financing opportunities in the power sector. Total loan assets
increased from INR 355,819 Mn in FY06 to INR 921,182 Mn in Q3FY11. In addition, its
loan asset portfolio has increasingly become diversified by sector and customer base.
As of December 31, 2010, 65.3%, 19.5% and 8.1% of our total loan assets related to
state sector, central sector and joint sector borrowers, respectively, while 7.1% related
to private sector borrowers. Total income and profit after tax were INR 74,870 Mn and
INR 19,470 Mn, respectively, in Q3FY11. Net Interest Margin was 4% and 4.1% in
FY10 and in Q3FY11 respectively, while Spread was 2.6% and 2.7% in these respective
periods. Consistently it has maintained the gross & net NPA levels at 0.03% & 0.02%
respectively.

Strong domain expertise & relationships with power sector participants

PFC established as an integral part of, and played a strategic role in, the GoI’s
initiatives for the promotion and development of the power sector in India for more
than two decades. As a result, it developed strong relationships with the Central and
State governments, various regulatory authorities, significant power sector
organizations, Central and State power utilities, private sector project developers, as
well as other intermediaries in the power sector. With its wide experience in
implementing government policies and programs provided it with industry expertise
that enables it to leverage project risk assessment capabilities to develop effective loan
disbursement.

Power sector to drive growth

PFC provides a comprehensive range of financial products and related advisory and
other services from project conceptualization to the post-commissioning stage, to its
clients in the power sector, including for generation (conventional and renewable),
transmission and distribution projects as well as for related renovation and
modernization projects. It provides various fund-based financial products including
long-term project finance, short term loans, buyer's line of credit and debt refinancing
schemes, as well as non-fund based assistance including default payment guarantees
and letters of comfort. It also provides various fee-based technical advisory and
consultancy services for power sector projects. Power sector, a key infrastructure area,
is perceived as the main driver of India's higher economic growth. The 11th Plan
(2007-12) targeted 78,700 MW installed power generation capacity addition, while the
12th Plan (2012-17) aims at adding 1,00,000 MW. Ultra Mega Power Projects (UMPPs),
would result in significant generation capacity addition, particularly from 12th Plan
onwards, and Large Independent Transmission Projects on the lines of UMPPs will
enable significant strengthening of transmission infrastructure. This would provide
company with good financing opportunities to fund projects with a long gestation
period. The company's future strategy will be to accelerate growth by expanding the
business in power sector and also by spinning off the new business units/ subsidiaries
into individual companies with significant income stream, which will remain focused
exclusively in their domain of operations.

Wealth Research, Unicon Financial Intermediaries. Pvt Ltd.

Email: wealthresearch@uniconindia.in
 Operational flexibility to capitalize on both fundraising and lending opportunities
PFC is registered with the RBI as an NBFC and has also been classified as an IFC. It’s
NBFC and IFC classification enables it to be operationally more flexible than some of
its competitors and effectively capitalize on available financing opportunities. As an
NBFC, it is governed by regulations and policies that are generally less stringent than
commercial banks, including with respect to liquidity requirements and the
requirement to hold a significant portion of funds in relatively low yield assets. In
addition, as a government-owned NBFC, loans made by PFC to Central and State
entities in the power sector have been exempted from RBI's prudential lending
(exposure) norms applicable to other non government owned non-deposit taking
systemically important NBFCs. The above competitive advantages help the company
in providing project financing for large, long-gestation power sector projects. For
example, an IFC is entitled to lend up to 25% of its Owned Funds to a single borrower
in the infrastructure sector, compared to 20% of Owned Funds by other NBFCs
categorized as a Loan Company.

Favorable credit rating and access to various cost-competitive sources of funds

PFCs primary sources of funds include equity capital, internal resources and domestic
and foreign borrowings. CRISIL and ICRA have granted it, the highest credit ratings
of "AAA" and "LAAA", respectively, for its long term domestic borrowings and "P1+"
and "A1+", respectively, for its short-term borrowings. International credit rating
agencies Moody's, Fitch and Standard & Poor's have provided PFCs long-term foreign
currency issuer ratings of "Baa3", "BBB-" and "BBB", respectively, which are at par
with the sovereign ratings for India. These ratings helped to borrow funds easily.

Concerns
Managing asset quality to be a challenge for PFC, as its loan portfolio is largely
concentrated to certain borrowers which are historically loss-making. As of December
31, 2010, its single largest borrower accounted for 8% (INR 73,567 Mn) of its total
outstanding loans, and top five and top ten borrowers accounted for, in the aggregate,
32.4% (INR 298,779 Mn) and 54.1% (INR 498,137 Mn), respectively, of its total
outstanding loans.

Peer Valuations
Peer Comparison P/BV
PFC (Upper Band) 1.2
PFC (Lower Band) 1.1
PFS 1.5
REC 1.6
Source: RHP, Unicon

Outlook & Valuation

Going ahead, power sector outlook remains strong due to huge demand-supply gap.
This augurs well for power finance companies with strong domain expertise &
relationships with government & private bodies. The stock is being offered at 1.1x and
1.2x of its current book value at the upper and lower price bands respectively, which
is cheaper to its peers. Further, looking at tremendous growth prospects in the power
sector and diversified portfolio of PFC, we recommend subscribing to the issue.

Wealth Research, Unicon Financial Intermediaries. Pvt Ltd.

Email: wealthresearch@uniconindia.in
Financials
Balance Sheet (INR in Mn) Profit & Loss (INR in Mn)

Particulars 9MFY11 FY10 FY09 Particulars 9MFY11 FY10 FY09

Income
Fixed Assets
Operating Income 74,543.7 80,610.4 65,514.3
Gross Block 989.0 934.4 973.4
Other Income 134.3 206.7 222.4
Less: Accumulated
Total Income 74,678.0 80,817.2 65,736.7
Depreciation / Amortisation (231.8) (204.5) (221.9)
Expenses
Net Block 778.0 747.2 751.5 Interest and other charges 46,913.0 49,123.6 44,326.5
Capital Work-In-Progress 20.8 17.3 0.0 Bond Issue Expenses 482.1 437.9 655.9
Investments 413.2 314.3 358.6 Personnel & Administration and
Loans 921,182.6 798,557.6 644,289.9 Other Expenses 799.8 924.5 709.1
Current Assets, Loans and Advances Depreciation 30.9 33.8 38.4
Cash and Bank Balances 7,272.5 13,942.9 3,928.4 Amortization of Intangible Assets 5.7 4.0 2.8
Other Current Assets 19,355.0 16,108.1 13,481.0 Provision for Contingencies 61.0 (5.7) 21.6
Loans and Advances 25,797.45 18,952.44 19,878.84 Provision for decline in value of
Total Current Assets, Loans investments (0.5) (15.2) 15.0
and Advances 52,424.9 49,003.4 37,288.2 Total 48,292.0 50,503.0 45,769.2
Total Assets 974,798.7 848,622.5 682,688.1 Profit before tax 26,385.9 30,314.2 19,967.5
Liabilities and Provisions Provision for Tax (6,982.5) (8,024.3) (5,360.7)
Unsecured Loans 764,465.0 671,084.1 521,601.5 Provision for Fringe Benefit Tax 0.0 0.0 (7.3)
Deferred Tax Liability 811.0 469.5 554.8 Profit after tax 19,403.5 22,289.9 14,599.5
Interest Subsidy Fund from
GOI 5,706.6 6,634.9 9,089.4
Current Liabilities &
Provisions
Current Liabilities 30,724.1 21,254.7 18,546.6
Provisions 20,363.8 15,861.3 15,825.1
51,087.9 37,116.0 34,371.6
Total Liabilities 822,070.6 715,304.4 565,617.2
Net Assets 152,728.2 133,318.1 117,070.9
Represented by :
Share Capital 11,477.7 11,477.7 11,477.7
Free Reserves & Surplus 131,743.6 113,389.3 98,391.8
Networth 143,221.3 124,867.0 109,869.4

Wealth Research, Unicon Financial Intermediaries. Pvt Ltd.

Email: wealthresearch@uniconindia.in
 Unicon Investment Ranking Methodology

Rating Buy Accumulate Hold Reduce Sell

Return Range >= 20% 10% to 20% -10% to 10% -10% to -20% <= -20%

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