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Power Finance Equity Research

HomeCompanyPower Finance Equity Research

Date of Research – 22 January 2016

Price – Rs. 157.00

About the Company

Power Finance Corporation Limited (“Power Finance” or the “Company”) was set up in the year 1986 and is dedicated to power sector financing and to the integrated development of the power and associated sectors. The Company is registered as a Non Banking Financial Company (NBFC) with the Reserve Bank of India (RBI). On July 28, 2010, RBI, classified the company as an ‘Infrastructure Finance Company (NBFC-ND-IFC)’. The Company provides financial resources to the power and associated sectors.

Power Finance’s product portfolio comprises of financial products and services like project term loans, equipment lease financing, discounting of bills, short term loans, and consultancy services for various power projects in generation, transmission, and distribution sector as well as for renovation & modernization of existing power projects. In addition, PFC also provides technical, advisory and consultancy to power sector companies through its subsidiary company namely PFC Consulting Limited.

*Power Finance issued bonus share in the ratio of 1:1 on 26 August 2016. EPS and P/E numbers are adjusted to reflect the effect of issue.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 17,302.61 21,614.53 24,952.88 27,780.21  27,289.86
Expenses 152.86 243.55 234.42 313.35  5,539.14
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 17,149.75 21,370.98 24,718.46 27,466.86  21,750.72
Depreciation 5.96 5.23 7.92 20.08  40.82
Finance Costs 11,162.13 13,756.02 16,323.67 18,385.24  16,767.64
Other income 11.86 14.69 59.00 105.56  321.43
PBT 5,993.52 7,624.42 8,445.87 9,167.10  5,263.69
Tax 1,555.78 2,162.58 2,441.47 2,983.10  3,027.59
PAT (before Minority Interest and share of Associates) 4,437.74 5,461.84 6,004.40 6,184.00  2,236.10
Profit/ (loss) attributable to Minority Interest – 
Share of profit / (loss) of Associates – 
Consolidated Profit / (Loss) for the year 4,437.74 5,461.84 6,004.40 6,184.00  2,236.10

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 99.12 98.87 99.06 98.87  79.70
Net Profit Margin Ratio 25.65 25.27 24.06 22.26  8.19

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
Share Capital 1,319.93 1,320.02 1,320.04 1,320.04 1,320.04 
Reserves & Surplus 19,473.02 22,837.67 26,202.23 31,091.31 34,708.27 
Net worth (shareholders funds) 20,792.95 24,157.69 27,522.27 32,411.35 36,028.31 
Long term borrowings 95,866.98 1,39,582.71 1,42,491.57 1,64,995.41 1,72,614.57 
Current liabilities 18,355.46 5,827.35 23,212.06 30,018.84 36,495.47 
Other long term liabilities and provisions 579.59 357.85 820.81 1,297.78 1,779.44 
Deferred Tax Liabilities 86.75 273.00 188.27 301.96 
Total Liabilities 1,35,681.73 1,69,925.60 1,94,319.71 2,28,911.65 2,47,219.75 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
Fixed Assets 77.06 74.95 72.26 103.92 245.11 
Noncurrent Investments 23.00 56.38 23.60 23.80 1,819.23 
Current assets 22,947.65 4,963.84 25,169.68 30,534.68 44,399.19 
Long term advances and other noncurrent assets 1,12,118.61 1,64,830.43 1,69,054.17 1,98,249.25 2,00,756.22 
Foreign Currency Monetary Item Translation Difference Account 515.41 – 
Total assets 1,35,681.73 1,69,925.60 1,94,319.71 2,28,911.65 2,47,219.75 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
ROCE 11.09 10.35 12.57 12.52 13.16 
ROE / RONW 14.71 18.37 19.85 18.53 17.16 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 17,302.61 21,614.53 24,952.88 27,780.21 27,289.86 
Growth (%) 32.36 % 24.92 % 15.44 % 11.33 %  (1.77 %) 
PAT (Rs. Cr.) 4,437.74 5,461.84 6,004.40 6,184.00  2,236.10  
Growth (%) 45.08 % 23.08 % 9.93 % 2.99 %  (63.84 %) 
Earnings Per Share – Basic (Rs. ) 16.81 20.69 22.74 23.43 8.47 
Earning Per Share – Diluted (Rs. ) 16.81 20.69 22.74 23.43 8.47 
Price to Earnings 5.40 7.10 6.00 3.67  14.69 

Dividend History

 

The Company has maintained an average dividend yield of 4.08 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. PFC’s average current ratio over the last 5 financial years has been 1.02 times which indicates that the Company do not face liquidity constraints to pay for its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

PFC’s average long term debt to equity ratio over the last 5 financial years has been 5.05 times which indicates that the Company operates with a high level of debt. A high long term debt to equity ratio is normal for a company which is primarily engaged in the business of finance and lending.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

PFC’s average interest coverage ratio over the last 5 financial years has been 1.52 times which is optimal for a Company which is in the business of finance and lending.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Power Finance reported a promoter holding of 66.35 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 27.18 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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