Yes Bank: The Brave Warrior of Indian Banks

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This report has been refreshed, read the latest April 2014 report Yes Bank – A Rediscovery

  • Date: September 12, 2012                               
  • CMP: Rs 333  Its a Large Cap with Mkt Cap Rs 11,833 cr               
  • Valuation: Today’s is Rs 414, available at 24% discount
  • Mar’14 target is 790 
  • Advice:  Buy now and systematically. 

Summary:

Key Reasons to Invest:

  • Aggressive growth (will continue in 35-45%), stable NIMs and profitablility
  • Investments in Retail and SME will provide next phase of expansion
  • Vision for 2015 is achievable and inspiring
  • The 14% fall since Mar ’12 gives an opportunity to invest at lower levels

Risks:

  • Global and India slowdown continues
  • Exposure to troubled sectors – Airlines, Power

This is an update of the Mar’12 Report by JainMatrix Investments – LINK

Yes Bank – Description and Profile

  • Yes Bank (YB) started in 2003, received the only New Bank license issued by RBI in 15 years.
  • Leaders are Rana Kapoor, Founder, MD & CEO and Aalok Gupta, EVP & Country Head- Retail
  • Promoter stake is 26%; other shareholders are FIIs 43%, MFs/ DII 14%, Individual – Retail /HNI 9.5%, Bodies Corporate/etc. 7.5%.
  • The firm has 4,875 employees; branches doubled in 1.5 years to 380 in 275 cities, with 650 ATMs.
  • Market cap is at 9,300 crores, putting it at #12 among Indian banks, and #7 in private sector.
Yes Bank - Growth Parameters, JainMatrix Investments

Fig 1 – Yes Bank – Growth Parameters, JainMatrix Investments (click any graphic to enlarge)

Superior Strategies and Execution

  • YB has a Vision 2015 (Version 2.0) which is an inspiring combination of soft and hard targets – “The Best Quality Bank of the World in India”; and 900 Branches, 12,750 employees, 2000 ATMs, Advances –`100,000 cr., Deposit base –`125,000 cr. and Balance Sheet –`150,000 cr. (as of now).
  • Seasoned, capable bankers in the Management team provide stability.
  • The focus is on Retail and SME banking involves growth in branches and investments in Sales and retail products. Recent deregulation of Savings Account interest rates allowed YB to introduce highest rates of 7%. The CASA is up from 10% in March ‘10 to15% by March ’12. Fig 1,
  • The firm rapidly enters high potential sectors for advisory, loan and banking services, with a Knowledge based approach to lending. Advances grew 45% CAGR in 4 years (industry growth 22%). With this approach, YB is pretty much The Brave Warrior of Indian Banks.
  • The Loan Book is well diversified, and the banks credit exposure to sensitive sector (due to asset price fluctuation) like capital markets, real estate, power, iron & steel and textiles are below the industry average. Here is a view of the top ten sectors as part of the Loan Book Distribution, Fig 2.
Yes Bank, Loan Book Distribution, JainMatrix Investments

Fig 2 – Yes Bank, Loan Book Distribution, JainMatrix Investments, (click any graphic to enlarge)

 

  •  In business development, mistakes are made, but YB learns from these, and exits fast (example – in 2007, the category of foreign exchange derivative products sold to SMEs turned loss making. There were litigations against YB (and several other banks too). These are now resolved.
  • Growth will be organic as executives feel that organic growth costs less compared to available assets

 

Industry Note

  • Scheduled Banks in India are Public Sector (27), Private Old (22), Private New (8) and Foreign (38).
  • Total number of (scheduled bank) savings accounts was 12.1 crore in 2011. But 80% are inactive, giving 2.4 cr. active accounts. The gross penetration is 10%, and active accounts penetration is 2%. Thus India is underbanked. (RBI data).
  • The FY12 credit growth of Indian banks was in line with the RBI projection of 16%.
  • Market share in savings accounts of banks dropped – SBI/associates (30.3 to 29.2%), other nation-alized banks (49 to 47.8%), foreign (5.8 to 5.2%), but Private banks grew (14.9 to 17.8%) by FY12.
  • The global Basel III requirements require banks to hold top quality capital equal to 7% of their assets adjusted for risk, will be phased in between 2013 and 2019. Aimed at improving financial stability and avoiding a repeat of the crisis of 2008, they will increase the cost of capital for banks.
  • Channels: By 2011, there were 93,800 ATMs in India, about 70% of them in Metro/ urban locations. Mobile banking is also an important banking channel, due to penetration of smartphones and 3G.

Stock Evaluation, Performance and Returns

  • YB had its IPO in July’05 priced at Rs 45. It was 31 times oversubscribed. At CMP of Rs 333 today, the stock has given a 28.5% CAGR return since IPO.
Yes Bank, Price Trend, JainMatrix Investments

Fig 3 – Yes Bank, Price Trend, JainMatrix Investments

  • The share has risen well, but is volatile. After IPO, price rose to 277 in early 2008, fell to 41 in Mar ’09 and peaked at 389 in Mar ’12. Today, it is 14% below this peak price. See Fig 3.
  • EPS has grown at 59.5% CAGR over 5 years, Fig 4.
Yes Bank - Quarterly Income and EPS, JainMatrix Investments

Fig 4 – Yes Bank – Quarterly Income and EPS, JainMatrix Investments

  • Quarterly Income and Profit too have grown rapidly (Fig 5), with NII + Other Income, NII and Net Profit growing at 46.5%, 57.4% and 59.6% CAGR over the last 5 years.
Yes Bank, Quarterly Income Profit, JainMatrix Investments

Fig 5 – Yes Bank, Quarterly Income Profit, JainMatrix Investments

  • The maiden dividend of Rs 1.5 was paid in 2010. Thereafter dividend has shown a steady increase.
  • The P/B ratio has fallen over 6 years, in spite of price rise, due to rapid growth in Book Value, Fig 6.
Yes Bank - Price, Dividends, BookValue, JainMatrix Investments

Fig 6 – Yes Bank – Price, Dividends, BookValue, JainMatrix Investments

  • Price and PE chart Fig 7, shows that average PE has been 15, while the PE range has been between 5 and 25. PE today is 11.2 and clearly in the ‘below average’ quartile. This PE fall has happened in spite of earnings growth, Fig 8.
Yes Bank, Price and PE Chart, JainMatrix Investments

Fig 7 – Yes Bank, Price and PE Chart, JainMatrix Investments

  • Price and EPS quarterly graph, Fig 8, shows that EPS growth has been improving. The Share Price has been roughly following EPS. We expect the EPS of YB to stay within the channel in Fig 8.
Yes Bank, Price and EPS Chart, JainMatrix Investments

Fig 8 – Yes Bank, Price and EPS Chart, JainMatrix Investments

  • NIM has been between 2.7-3.2% over the past 5 years. This is low by industry standards as CASA is low. Capital Adequacy is at 16.5%, which is good.
  • Gross & Net NPA are at 0.28% & 0.06%, among the lowest NPA levels in the industry.
  • ROE and RONW are between 20-24% in FY12, which is excellent.
  • Beta of the stock is 1.61 (Reuters) indicating high volatility.
  • PEG is at 0.33 – indicates safety and great value.

Benchmarking and Financial Projections

In a benchmarking exercise, we compare YB with 3 firms in the same or related industry, Table 9.

Yes Bank, Benchmarking Aanalysis, JainMatrix Investments

Table 9 – Yes Bank, Benchmarking Analysis, JainMatrix Investments

  • Conclusions: Compared to peer Banks, YB holds its own on most parameters. YB looks particularly strong on EBITDA and Profit per employee ratios indicating high productivity.
  • Bajaj Finance has the flexibility of an NBFC, and has performed better on many parameters. See Research Report on Bajaj Finance.

In a Financial projections exercise, we project YB financials till FY 2014, See table 10.

Yes Bank - Financial Projections, JainMatrix Investments

Table 10 – Yes Bank – Financial Projections, JainMatrix Investments

Risks:

  • Current Economic and Government data indicate a slowdown across industry, a rising govt fiscal deficit, current account deficit, and weak rupee. Further, oil prices are high and other commodity prices are falling. Decision-making is slowing in the government, as past decisions are being revisited in Telecom and Coal. These point to a slowdown that can affect YB.
    • YB will continue to lead on performance parameters. But if there is a sector slowdown, the performance will be affected. The poor Indian economic data if seen in the context of an international slowdown, suddenly looks better than many other countries. Currently the Indian market indices are holding up well due to FII confidence and fund inflows. So there may be a cushion to the fall in Indian Indices.
  • YB is an aggressive player that enters new potential sectors and can make mistakes that can affect the overall brand. These can impact sentiment and valuations.
  • Infrastructure woes: Ratio of Non-fund based exposure to Power Sector to net worth is high at 49% (Macquarie Research). This sector while critical for the India growth, is in a stressed condition, and awaiting government driven systemic improvements. Also exposure to troubled Airline sector. Airline companies owe RS 770 Cr to YB.
    • The Loan Book details in Fig 2 and the calibrated approach to loans exposure build confidence that YB has a safer approach than industry.

Opinion, Outlook and Recommendation

  • India is underbanked. There is potential for Banks to invest in new sectors and stimulate industry growth. In Retail, the consumption play is bank accounts, personal/housing loans, credit cards, etc.
  • The banking industry is also a proxy to the overall economy, and one can expect, as a thumb rule, the industry to grow at 2-3 times the GDP growth. The Indian economy is well placed to grow at 6-9% per annum over the next decade. Basis this, the Banking sector will grow at 15-24% p.a.
  • YB is well placed to exploit the trend of Private sector growing faster than PSBs, and its own growth rate will be superior to the peers. The strategies followed and good execution means that the growth will continue to be in the 35-45% range for the next 3 years.
  • The recent price fall of 14% since the peak in Mar ’12 provides an opportunity to invest in YB.
  • The share price is currently poised at its 200 DMA of 333. The expectation is that it will take support at these levels before rising higher.
  • The valuation and projection/ targets for YB are:
    • Current valuation is of 414, indicating it is available at a 24% discount at CMP
    • The target for March ‘14 is 790 (a 137% appreciation)
  • YB will continue on the path of solid stock performance and dividends over the next decade. Invest now and systematically to gain for the long-term.

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Consult your financial planner for deciding about your investment funds.

Bajaj Finance, Auto-matic Growth

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This report was updated on 23rd Jan 2014, find the new report on Link.

  • Date: 31st Jan 2012
  • CMP: Rs 723                     Mid Cap with Market Cap Rs 2534 crores
  • Advice: Invest                  Target: 1750 by 03/13 and 2700 by 03/14

Bajaj Finance is an NBFC on a growth path. It is a leader in auto and consumer durables loans, but customers are spread across Retail 60% and SME/ Corporate 40%. Key strengths are all India reach; strong ‘Bajaj’ brand and rapid entry into new growth segments. Revenue, NII, Net Profit and EPS have grown at 28-41% CAGR over 7 years, and performance did not slow in 2011. Gains can accelerate in a falling interest rate scenario. Invest in this potential multi bagger.

JainMatrix Investments published this report to Subscribers (31/01) and all readers (1/03)

Bajaj Finance – Description and Profile

  • Bajaj Finance (BF) is a NBFC promoted by Bajaj Auto over 23 years ago. Post a 2008 restructuring, Sanjiv Bajaj is handling the financial services business of Bajaj Auto group, including Bajaj Finance.
  • BF was set up as a captive financier of Bajaj Auto’s 2 & 3 wheelers. It has now expanded to related areas such as loans for Consumer Durables, Against Property, Small Business, Construction Equipment, Against Securities, Personal Loans, and Insurance Services, see Fig 1.
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Fig 1 – Bajaj Finance – Business Segments (click to enlarge)

  • About 60% of its business is consumer oriented – B2C, while rest is B2B, with a SME focus. The largest Segments are Consumer durable and 2/3 wheelers. BF is diversified across customer segments and geographies; this de-risks operations and inspires a confidence in continued growth.
  • BF has a network of 4000 distribution partners/ dealers and 225 points of presence. It has 5 million customers across the country.
  • In 2011, BF added 603 permanent employees, taking total employees to 1657. This is a sign of business confidence and investments in expected growth.
  • Funds sourcing – CRISIL has rated it at FAAA/Stable for FDs, indicating a high safety with regard to timely payment of interest and principal.
  • The company has just launched a new loan product specially designed for SMEs, called “flexisaver”. This could be an excellent offering for this segment.
  • BF has a capital adequacy ratio at 17.5%. This is good. Even so, to fund rapid growth, BF is expected to raise Rs 750 crores in 2013 through a QIP or Private equity route.
  • Management intends to raise its equity holding to 75% from the current levels. This indicates high ownership, which is good. See Fig2.
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Fig 2 – Bajaj Finance – Shareholding Pattern (click)

  • Another positive is the stake holding from Mutual Funds, FIIs and DIIs.

Industry Note

  • There are a large number of NBFCs in India (>10,000). These are relatively unregulated companies, unlike Banks that are governed by RBI. In this fragmented market, there is tremendous opportunity to offer Loans and Financial services in a fast growing economy of India, to Individuals (Retail), SME and Corporates.
  • RBI has projected a 16% growth in loans for Banks; NBFCs should have higher industry growth rates.
  • Current projections – of fall of interest rate cycle, and lower inflation, is positive for this sector. See article on this Trend.

Unique strengths:

  • Strong ‘Bajaj’ brand; BF also shares in the growth of Bajaj Auto through the Auto loans service. Also a leader in Consumer Electronics/ durables loans with presence in showrooms of top Retail chains.
  • With Sanjiv Bajaj at the helm, there is clarity in management succession. He is also a talented and ambitious finance professional and promoter.
  • A strong distribution network, spread nationally with presence across customer segments, industries and geographies. The BF strategy is to diversify loans with a 30% segment cap. This will provide a de-risked business model.
  • The group financial services ambitions and new initiatives are going to be routed through BF.

Stock Evaluation, Performance and Returns

  • Listed long back, BF has shown excellent performance over the last 5-7 years, as seen in the charts.
  • The Net Profit, Net Interest Income and NII plus Other Income have grown at 28-38% CAGR over 7 years. Growth has really accelerated since 2008. See Fig3.
JainMatrix Investments

Fig 3 – Chart with Quarterly Net Income, Profit

  • Revenues rose over a 7 year period at 41% CAGR; and EPS at 28% CAGR, see Fig 4.
  • The share has appreciated by 22% CAGR over 7 years. However, post the 2009 fall, the appreciation has been very steep at 112% CAGR.
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Fig 4 – Chart with Quarterly Income, EPS

  • In 3 years, Share Price & dividends have appreciated (Fig 5); P/BV is not too high
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Fig 5 – Chart with Price, Dividends, P/BV

  • Price and PE chart shows that PE is currently at all time lows even though the Price has risen to 700+ levels. It seems the full effect of the Earnings improvement is not yet reflected in the Price, see Fig 6.
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Fig 6 – Price and PE Chart

  • ROCE is 12% and ROE is 19.7%, these are good ratios.
  • The EPS growth has accelerated since 2008, (Fig 7). This is an excellent chart of the firm’s growth.
  • Its asset under management stood at Rs 11,919 crore as in Dec’11; as against Rs 6,868 crore a year back (up 74% YoY). The overall credit growth of the company is significant at a time when the entire industry is experiencing a slower credit off-take.
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Fig 7 – Price and EPS Chart

  • Of late, BF has improved asset quality. Its net non-performing asset (NPA) ratio stood at 0.25% in FY12 Q3 as against 0.33% in Q2. Current net NPA is the lowest for the company in the last five years.
  • PEG is at 0.29 – indicates undervalued status

Peer Benchmarking and Financial Estimates till FY14

  • BF in this comparison shows better growth characteristics. See Exhibit 8.

JainMatrix Investments

  • BF is also superior due to multiple customer segments – a de-risked business model.
  • Three-year projections of BF financials indicate a robust ramp up of revenues and profits, Exhibit 9.

JainMatrix Investments

Risks:

  • Interest rates unpredictability. This will affect our growth projections for BF.
  • Hyper competition.  An excessive ramp up/new entrants of NBFCs & Banks can affect BF performance
  • Promoter driven consolidation. Bajaj group has financial firms like Bajaj Allianz (Insurance), Bajaj Financial Solutions (Wealth mgt) and Bajaj Finserv (Holding Co). Consolidation will change the outlook.
  • Unpredictable events like a European sovereign default, some new media issue/ bad publicity or any governmental charge sheet, etc. can occur that can mar equity performance for short periods.
  • Past performance is no indication of future results

Opinion, Outlook and Recommendation

  • Indian market is underserved for loans and financial services. Quick calculations show BF has 5-7% market share among listed Indian NBFCs (non Bank). While small, this indicates a big market for BF to grow.
  • In the last three years, BF has embarked on a business trajectory that, if sustained, can make it a top 3 NBFC in 4-6 years. In essence it may move from mid-cap to large-cap, and shareholders could be holding on to a ten bagger.
  • Invest now and systematically for long-term out-performance.

The projection/ targets for Bajaj Finance are

  • March 2013   –  1750  –  140% appreciation
  • March 2014  –  2700  – 270% appreciation

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L&T Finance Holdings – IPO – Invest

Price band 51-59 ; Issue period Retail – July 27 – 29, 2011.        

(For a detailed note on L&T Finance Holdings IPO with analysis, business charts and IPO risks, subscribe for free to this blog, on the right panel)

Update on July 28th

  • On the second last day, the IPO has already been subscribed 1.21 times, with breakup of QIB (0.72), HNI (0.5), Retail (2.21), Employees (0.51) and Shareholders (0.96).
  • Retail has the highest oversubscription till now !! This is a new phenomenon. Looks like QIB’s are worried about USA’s debt problems, and a dull Sensex with an Interest Rate increase over last 2 days has affected overall demand.
  • The investment limit for Retail is Rs 2,00,000. If you want to maximise your subscription, bid for 3300 (33X100 lot size) shares at Cut Off for an investment of Rs 1,94,700.
  • Good luck !!

Report on July 25th

L&T Finance Holdings is a high quality NBFC offering. Buy with a 2-3 year investment perspective.

L&T Finance Holdings – Description and Profile

  • This is the first public issue from the house of L&T since the parent’s listing way back in 1950
  • L&T FH is the holding company for the financial services business of the L&T Group. L&T FH has four arms that manage the mutual fund, asset financing, infrastructure financing and working capital funding businesses. This includes firms like L&T Infrastructure Finance, L&T Finance, India Infrastructure Developers, L&T Investment Management and L&T Mutual Fund Trustees.
  • L&T FH plans to mobilize Rs 1,245 crore, for a 14.2% dilution (17% total dilution including pre – IPO placement), valuing the firm at Rs 8,700 – 9900 crores.

L&T – Snapshot

  • L&T is a proxy for infrastructure, machinery and construction in India. The recent aggression and focus on core competence by management in the last decade has yielded results – of excellent growth and profits.
  • Over the last 10 years, L&T share has shown results:

–          Share price increased 48% CAGR

–          EPS has increased 31% CAGR

My conclusion is that L&T has rewarded shareholders over the years,  grown consistently and transparently, and built a good reputation. And this rubs off very positively on L&T FH.

L&T FH Financials

  • At Rs 59 (upper end of the price band), the L&T FH valuations are at 2.2 times the consolidated FY-11 book
  • The capital adequacy of L&T Finance and L&T Infrastructure Finance is 16.5 per cent.
  • Business Assets of L&T F and L&T IF combined are 11,491 crores as of Mar 2010; Assets have grown at 77% CAGR over the last 5 years
  • Combined PAT is 267 crores in Mar 2010; PAT has grown 62% in last 5 years
  • These high growth rates are expected to continue for many years, as Infrastructure spending in India is on the upswing.
  • Another attractive investment in this space is Yes Bank, see the report

IPO Offer:

  • The IPO price band is 51-59 per share; Issue period for Retail is July 27-29, 2011.
  • Investor categories includes – interestingly – Shareholders, in addition to the usual QIB, NII (HNI), Retail and Employees. Shareholders can decide if they wish to bid for shares under shareholder quota or Retail/HNI, as multiple bids may be rejected.
  • The purpose of the IPO is:
  • Retire Rs 345 crore of inter-corporate deposits. The inter-corporate deposit was taken from L&T to support the capital needs of its subsidiaries last fiscal.
  • To support capital adequacy ratio of its subsidiaries. Around Rs 570 crore would go to L&T Finance,and Rs 535 crore would be used for augmenting capital of L&T Infrastructure Finance.
  • P/E at upper end may be around 21 times.  The IPO has been rated – IPO GRADE 5 by the Agencies – CARE and ICRA, indicating superior fundamentals

Opinion, Outlook and Recommendation

  • All the large Capital Goods and Infrastructure firms worldwide have created finance arms/ tie-ups to bundle their product with financing. This provides a good synergy as the product is capital intensive e.g. GE Capital, Airbus and Boeing financial arms, etc.
  • The L&T Finance business will be better valued as an independent company, rather than as a mere subsidiary
  • L&T FH is well diversified as a firm, and is present in the high growth areas of Infrastructure financing and Rural development
  • The prospects for L&T are good over the next decade. L&T FH has strong synergies with the parent firm, and by independent listing, will be able to manage it’s capital needs and growth better
  • Invest with a 2-3 year horizon.
  • Check back on this website www.jainmatrix.com for updates

Do you find this report useful? Please comment below. For a detailed note on L&T Finance Holdings IPO with analysis, business charts and IPO risks, subscribe for free to this blog, on the top of the right panel

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/

Sparkling Power Finance Corp FPO – May 10-13

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 11th Plan now)
  • Plan vs Achievement has been as low as 51.5% in the 10th 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 - FPO

Capacity addition – Power

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
Power Finance Corp - FPO

PFC investor Returns

  • PFC has certainly outperformed the NIFTY since it’s IPO.
Power finance Corp - FPO

PFC has outperformed the Nifty

  • Key financial metrics of PFC are showing a steady uptrend
Power Finance Corp - FPO

PFC – financial snapshot

  • Quarterly profits are showing steady growth (except the last quarter)
Power Finance Corp - FPO

PFC – Income and Profits

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.
Power Finance Corp - FPO

PFC – Asset and Borrower profiles

  • 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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