Stock market investors and rating companies seem to have opposite views on Power Finance Corp. (PFC). On one hand, the stock has crashed 35% since the beginning of the fiscal year, underperforming both the BSE power index and the broader market. However, Fitch Ratings Ltd and Crisil Ltd have assigned their highest ratings to PFC’s debt instruments.
The stock market view can perhaps be gauged from the company’s quarterly earnings. After a tepid 5% growth in first quarter profit, PFC reported a profit after tax of Rs 420 crore in the three months ended September, down 40% from a year ago. However, that was mainly owing to a Rs 530 crore notional loss arising from the impact of the rupee depreciation on its foreign currency borrowings. PFC traditionally hedges only short-maturity exposure and the majority of its forex loans mature six years later.
Given the constrained coal-supply situation in the country, falling load factors at generators and defaulting power distribution companies, the key questions are: one, will the company’s bad loans spiral up; and two, will earnings be affected?
The headline gross non-performing asset (NPA) numbers seem decent compared with the banking sector. PFC’s gross NPAs as a percentage of total advances is 0.2% at the end of September.
According to Crisil, at the end of March, 80.5% of loans to state-owned power firms had an escrow mechanism. About 85% of PFC’s loans are to the generating sector, where financial troubles aren’t as entrenched as in the distribution sector. Remember, PFC itself is a state-owned company, and in the past, the government has allowed the firm access to central funds and permission to float tax-free bonds etc.
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The power sector lender retained its net interest margin level at 4% for the September quarter, and posted an 18% increase in net interest income. Still, there are some risks to PFC’s earnings in the coming quarters despite its ability to pass on interest rate increases to consumers.
One reason for a possible hit to earnings is that PFC may need to provide around Rs 300 crore this fiscal based on non-banking financial company norms for standard assets, according to Crisil estimates. It is currently excused from this, though it already has a bad and doubtful debt reserve of Rs 105 crore. Secondly, loan growth is likely to slow as fuel issues, environmental clearance and higher interest rates dog new projects. So far this year, sanctions have more than halved from year-ago levels, while disbursements have remained flat.
That would continue to weigh on the stock, even if there seems to be adequate protection against assets turning bad.
Graphic by Naveen Kumar Saini/Mint
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