Fundamental Pick of the Week - Power Finance Corp

Power Finance Corp.(POWFIN)

Current Price: 186.00 Target Price: 224.00
Time Frame: 3-6 mths Potential upside: 20%

Company Background

Power Finance Corporation (PFC) is a leading public financial institution and an NBFC providing fund and non-fund basedsupport for the development of the power sector.In 1999, the government granted a mini navratna status to PFC. PFC's clients include power utilities, both central and state, power departments, private power utilities(including independent power
producers), joint sector power utilities, power equipment manufacturers and power utilities run by local municipalities. The company channels investments into the power sector and functions as a vehicle to develop the sector. PFC came out with its first public issue in Feb 2007.
In FY07, the company clocked a net profit of Rs 1,152 crore.

Investment rationale

Huge opportunities in power sector.

High capital adequacy ratio, low leverage.
High operating efficiency.
Improving spreads to boost net interest income.

Key Concerns

Significant shortages in the supply of crude oil, natural gas or coal could adversely affect the Indian economy and the power sector projects to which company has exposure.
Political instability or changes in the government could delay the liberalisation of the Indian economy and adversely affect economic conditions in the country.

Power projects carry certain inherent risks attached to them. These could adversely affect business and financial performance as losses can be lumpy at times.

Financials

As of December 31, 2007, the company made cumulative sanctions of Rs 43,607 crore and cumulative disbursements of Rs 9,726 crore to power sector projects. PFC posted a net profit of Rs 911 crore for 9MFY08 as compared to Rs 615 crore during same period last year, recording a growth rate of 48% (this was on the back of healthy 39% growth in the net interest income, over 100% growth in other income and low operating expenses-to-assets ratio). The average interest spread has increased from 1.72% in 9MFY07 to 2.0% in 9MFY08. In addition, there has also been a decline in the gross NPAs from 0.21% to 0.03%.

We expect a 30% CAGR in PAT over FY07-9E.

Valuations

PFC has improved its RoNW to 14.36% from 12.15% giving a jump of 221 bps. Return on assets (ROA) has been consistently improving since listing with 9mFY08 annualised ROA at 2.45% as against 2.34% for FY07. Consultancy and advisory fees from power projects is also increasing rapidly showing 100% jump in first nine months. With business potential being huge for PFC,
we believe at 2x FY09E P/BV, the stock has more upsides. We value the stock at 2.5x FY09E BV giving a target price of Rs 224, a 20% upside from current levels.

Technical Outlook

The stock is currently trading near its 200-day EMA of Rs 194. Volumes have been gradually increasing along with the rise in prices, an indication the stock is being accumulated at current levels. We can expect a strong positive breakout in the coming days. On the charts, the stock has been trading range-bound between Rs 156 and Rs 185. A decisive move above the Rs 198
levels with good volumes could further propel it to Rs 210-232. On the downside, it has strong support at Rs 166. A fall below this level could see it go further down to Rs 148 levels.