Reforms key for Power Finance Corporation

Shares of Power Finance Corp. Ltd (PFC) have seen some volatility in the past month not only owing to the general turbulence in the market but also news reports that the government is going to sell some of its stock in the company. Despite that the shares have returned around double the gains of the S&P BSE 100 index.

Whether this run will continue depends on a variety of factors, not least the share-sale overhang. First, of course, are reforms in the power sector, of which much has been talked about. According to the Centre for Monitoring Indian Economy’s Capex database, about ₹ 2.4 trillion worth of projects in the power sector were stalled at the end of September. This logjam needs to be cleared not only for improving PFC’s loan book growth, but also for assuaging fears of asset quality.

In the September quarter, PFC’s loan growth was just 16% from a year ago. That was down from the 16.7% in the three months ended June and 18% pace at the end of March. Disbursements fell 14.6% from a year ago in the September quarter.

Although PFC’s gross bad loans are stable at around 1% of its advances book for the past couple of quarters, there is a growing sense of unease. After all, bank’s non-performing asset (NPA) levels in the power sector are much higher. For instance, about 3.4% of PFC’s loan book is exposed to gas-based projects, according Antique Stock Broking Ltd. Although the company has recognized part of this as NPAs, there is a fear that asset quality could get worse, especially since there is not much progress on gas in India. Note also that from March 2016, non-banking financial companies will have to classify loans as NPAs in line with banks—on a 90 days past due basis instead of 180 days now.

Moreover, PFC also has restructured loans to the tune of 7.5% of its asset book, according to Anand Rathi Securities. It has to build in 2.75% provisioning for this by the end of this fiscal year and raise it to 5% by March 2017; that will eat into profits in the coming quarters. The good news is that the company has just four projects exposed to the coal field de-allocation saga totalling 2.7% of its loan book.

To be sure, sanctions have picked up, rising 88% in the September quarter, but that is owing to the lower base of a year ago. In the final analysis, the company waits on power sector reforms to mitigate its risks and improve its earnings. That’s perhaps why the stock is still trading at around 1 time its estimated book value for the next fiscal year.

The writer does not have any positions in the companies mentioned here.