Power Finance remains in a prime lending position, as it is the nodal agency for most government power schemes.
Two key opportunities going forward could be the revised accelerated power development programme (APDRP) and the ultra mega power projects (UMPP).
However, our disbursal growth estimate of 18% for FY3/10 (vs 30% in FY3/09) for the company remains conservative at 23% of sanctions, as we believe some of the projects may spill over to FY3/11E.
We are including the upside from appreciation of the Indian rupee into our forecasts. PFC has unhedged liabilities amounting to $245 million, with the book being marked to market at Rs51.5/$.
We expect the rupee to appreciate by ~10% in FY3/10E and FY3/11E. This would result in a beneficial impact of around Rs1bn in each of the two years for PFC.
Earnings visibility for the company remains strong, with an expected EPS CAGR of 22% for the next two years. The earnings are expected to be driven mainly by strong loan growth (26% in FY10E and 20%E in FY11).
Amongst the sectors, generation should remain the primary driver of loan growth, as we believe the big-ticket opportunities remain there.
We believe growth opportunities for Power Finance remain substantial, with the company likely to benefit from any government push to the power infrastructure space.
However, the stock has run up, and at 1.9x P/BV appears to be fairly priced. We therefore downgrade the stock to NEUTRAL from Outperform with a target price of Rs200.