Update on late May 12th!

• PFC FPO got over subscribed 3.6 times on Thursday.
• While the FII portion was subscribed a healthy 6.9 times, the HNI (0.01 times) and Retail (0.34 times) subscribers are waiting for the last day. This indicates a likely surge tomorrow in the latter two categories.
• The maximum subscription amount for Retail is Rs 2,00,000. For Retail, if you want to maximise your subscription, bid for 1064 (28X38) shares at Cut Off (could be as low as 183.35) for an investment of Rs 1,95,084
• Good luck !!

FPO Note – May 10th

Power Finance Corp is a power sector PSU available at attractive valuations. Demand in the sector remains robust. Subscribe to the FPO.

Power Demand:

• The Indian power generation sector faces huge demand growth. See graph (we are in 11^th Plan now)
• Plan vs Achievement has been as low as 51.5% in the 10^th Plan
• The shortfall of peak power has been 8-12% in the last decade.
• Over 40% of Indian population still don’t have access to electricity

Power Finance Corp  – Description and Profile

• PFC is a firm that funds and stimulates power generation capacity in India. It is a Navaratna PSU registered as a NBFC with ‘Infrastructure Finance Company’ status.
• PFC has a market share of about 20% in the Indian power lending industry, across all entities, NBFCs/ Banks, private/ public, and Indian/ MNCs.
• PFC lends to a number of power generation firms, and is a nodal agency for Ultra Mega Power Projects (UMPPs), and the R-APDRP program (Restructured Accelerated Power Development and Reform Program), and for  other government driven power initiatives
• It also lends to related sectors like Transmission Projects and Distribution, and runs the DRUM program (Distribution Reforms, Upgrades & Management).

PFC Stock evaluation, performance and returns

• PFC first got listed in a Jan 2007 IPO, and got oversubscribed by 75 times; and the IPO price was set at Rs 85.
• Investors in the Jan 2007 IPO of PFC have earned a 22% CAGR return to date

• PFC has certainly outperformed the NIFTY since it’s IPO.

• Key financial metrics of PFC are showing a steady uptrend

• Quarterly profits are showing steady growth (except the last quarter)

Lending to Power sector

• PFC is a nodal agency to facilitate implementation of Ultra Mega Power Projects; these have a capacity of 4,000 MW. PFC charges consultation fee of Rs 15 crores for accomplishing the legal approvals and consultation for a UMPP, thus acting as a one-stop solution provider.
• The Ministry of Power, Govt. of India has launched the Restructured Accelerated Power Development and Reform Program (RAPDRP) in July 2008 with focus on establishment of base line data and fixation of accountability, and reduction of AT&C losses through strengthening and up-gradation of transmission and distribution network and adoption of information technology during XI plan.

• On the Assets side, PFC is primarily into Generation; the borrowers are mostly State Government bodies
• PFC is allowed to raise tax-free retail bonds; this has allowed it access to lower cost capital.
• PFC’s loan book grew at an annualized rate of 22.8 per cent over the period FY06 – FY11
• PFC is also analyzing entry into funding for Nuclear Power plants.

FPO Offer:

• The price band is fixed between Rs 193 – 203 per equity share. The offer will be open from May 10-13.
• Retail investors are offered a discount of 5 per cent in the issue price
• The IPO will raise funds of Rs 4400 – 4,700 crores at the lower and upper ends of the price band.
• The follow-on public offer (FPO) comprises a fresh issue of 17.21 crore equity shares by the company and an offer for sale of 5.73 crore equity shares by the Government of India. Currently Government holds 89%. The FPO would result into equity dilution of 14.99%.
• The purpose of the IPO is to

• Help PFC keep capital adequacy ratio at 15% over the next few years – it has fallen to 16% now after the lending operations of this year.
• Strengthen the Balance sheet

• At the upper end of FPO pricing, of Rs 203,

• P/E will be 8.9 times (Industry average is 12.2)
• P/B will be 1.88 times
• Dividend rate will be 2.2% – fair returns, and note that dividend payout will continue to increase
• Note that Retail may be allotted at 5% below 193 – that makes it quite attractive.

Risks:

• Power generation project execution: This was the primary risk a few years ago, with delays and technology challenges. But of late with the opening up to the Private sector, the execution capabilities are improving
• Power generation operations – Electricity payments from SEBs. The State Electricity Boards – SEBs cash losses have risen from Rs 6,500 crores in 2006-07 to Rs 28,400 crores in 2008-09. This may affect the payments to electricity plants, which in turn can affect PFC. However SEBs are undergoing restructuring in the States, and these should emerge stronger over the next few years
• Power generation operations – Fuel supply linkages

• Most power generation projects have Coal as fuel. Coal is generally supplied by Coal India Ltd. – which has not been able to meet production targets in recent quarters.
• There have also been supply chain issues with coal – such as inability of Indian Railways to handle transportation.
• Coal is also being supplied from Australia. This supply got affected recently due to floods there.
• The fuel supply risks are being addressed in new projects by long term commitments from suppliers for new power generation projects.

• While PFC’s gross and net NPAs have remained negligible in the last five years, defaults – it does not make provisions for loans turning bad – and higher credit costs could impact its balance sheet and earnings.

Opinion, Outlook and Recommendation

•  India is a power deficit country and the current growth path will require continued capacity additions and efficiency improvements for foreseeable future.
• PFC will see it’s role expanding for facilitating and funding power sector projects
• PFC is another monopoly PSU and will execute on government objectives, in an assured returns environment.
• The Indian government continues to offer PSUs at attractive valuations in public offerings
• PFC can be a Core holding in the Core – Satellite portfolio for investors.
• The current FPO offer is at 52 week low of market price. The fall in share price by 45% from the Oct 2010 peak has made current valuations attractive. This reduces the risk of the asset at this price.
• Watch for subscription data till May 12th to get a better idea of allotments – or even better, check back on this website www.jainmatrix.com for updates :-)
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Disclaimer:

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