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PFC follow-on offer: pain now, gain later

PFC follow-on offer: pain now, gain later
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First Published: Tue, Mar 22 2011. 11 21 PM IST
Updated: Tue, Mar 22 2011. 11 21 PM IST
Shares of Power Finance Corp. Ltd (PFC) have lost 8% in the last week compared with a 2.4% fall in the benchmark Sensex of the Bombay Stock Exchange.
It was the time when news resurfaced that the company will file for a share sale. True, all power stocks have declined recently, but PFC’s fall seems to have been accelerated by the usual selling that occurs once a follow-on public offer (FPO) is announced, as investors try to find an arbitrage.
This decline has also happened despite PFC’s decent financial numbers. Consider the results for the quarter ended December. PFC grew its loan book to Rs 92,120 crore, up 27% from a year ago. Revenue grew similarly. But for the impact of its unhedged foreign exchange portfolio, net profit would have been better than the 16% growth it reported.
Even after advancing money to shaky state electricity boards, PFC’s gross non-performing assets constitute only 0.01% of its portfolio. With its infrastructure finance company status, the firm sources about three quarters of funds from the bond market, where it has the same credit rating as the government.
Its net interest margin of 4.1% is, however, a fall of 10 basis points from a year ago, largely because of the general rise in interest rates. One basis point is one-hundredth of a percentage point.
Despite short-term concerns such as falling merchant rates and higher state utility losses, the consensus on the long-term outlook for the power sector in India is bright.
Just look at the 12th Plan target of 100,000 megawatts, or MW (and pray that execution picks up). PFC is well positioned to get a chunk of this pie as the nodal agency for 4,000MW power projects and is even considering putting in equity capital in some generators.
However, in the end, it is pricing that matters most for investors. After the disastrous FPOs of NTPC Ltd and NMDC Ltd, which had to be bailed out by the Life Insurance Corp. of India and state-owned banks, recent government offerings have been priced at steep discounts.
Power Grid Corp. of India Ltd’s offer price was at a 16% discount to the closing value on the day of announcement. Likewise, Engineers India Ltd was offered at a 19% discount.
At Tuesday’s closing price, PFC was trading at 1.38 times its fiscal 2012 book value. That compares well with peer Rural Electrification Corp. Ltd’s 1.53 (and the price-to-book value of 1.57 for the latter’s successful FPO).
Any further decline in prices will only make it more attractive for longer-term investors.
We welcome your comments at marktomarket@livemint.com
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First Published: Tue, Mar 22 2011. 11 21 PM IST