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8/3/2019 JM Financial - Initiating Coverage on Power Financiers.
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Power Financiers 9 December 20
JM Financial Institutional Securities Private Limited
Light at the end of the tunnel
POWF and RECL are best placed to leverage on the massive investment
opportunity: Over the next five years, c.$236bn is estimated to be invested inthe power sector as India scales-up infrastructure in generation, transmissionand distribution. REC and POWF are best positioned to leverage on themassive investment opportunity given a) IFC status which gives exposurelimits advantage, easier access to ECBs. IFCs have a competitive edge overbanks given better asset-liability profile. Further, most banks are approachingtheir sectoral limits for infrastructure sector which should reduce competitiveintensity for specialised power financiers like POWF and RECL.
SEB default unlikely losses may have peaked, tariff hike trendencouraging: SEBs have been under financial distress due to non-revision oftariffs, non-payment of subsidies and high merchant power rates. However,recent measures offer hope that their finances will improve going ahead ledby a) 5-40% tariff hike across states over the last 18 months (Exhibit 2).
Further, 3 of the 4 states (TN, UP, MP, Rajasthan) that account for c.70% ofcash losses have already raised/proposed to raise tariff while UP will raisetariff post election early next year. b) APTEL facilitating suo-motu tariffincrease by the regulator. c) Increasing pressure from lenders to improvefinances by raising tariffs/improving efficiency. d) Declining power purchasecosts which would provide much needed relief to SEBs. These measures are astep in the right direction and we believe financial position of SEBs willimprove going forward, implying that default from SEBs for POWF and RECL isunlikely.
Fuel availability - A key risk: Coal and gas availability, in our view, is asignificant threat which could restrict power supplies and impact financialviability of projects. Coal supply has been severely hampered due to a) CoalIndia unable to achieve sufficient production growth, b) delayed
environmental clearances, c) infrastructure bottlenecks, d) blending limitationin existing plants, e) pricing issues on imported coal from Indonesia andAustralia. However, recent steps by government to scrap go and no-go policyand granting environment clearances to some delayed projects should reducethis concern over the medium term (3 years); though fuel availability remainsa key near-term risk which could lead to restructuring of projects (especiallyIPPs in the capacity range of 50Mw-100mW) and result in some NPV loss forpower financiers.
Initiate coverage on POWF and RECL BUY with TP of`205 and `220
respectively - recent SEB/government measures and decline in wholesale ratesshould act as key catalysts: POWF and RECL have de-rated significantly overthe past 12 months due to concerns over financial health of SEBs (POWFcurrently trades at 0.95x 1yr fwd book, down from a peak of 2.9x; while RECL
at 1.1x 1yr fwd book, down from a peak of 2.9x. Going ahead, we believerecent SEB/government measures and decline in wholesale borrowing ratesfrom 1QFY13 (which will impact spreads positively) should act as keycatalysts for stock outperformance. We initiate coverage on POWF with Mar13TP of`205 current valuations are attractive at 0.9x FY13E book withdividend yield of c.5% (based on FY13E dividend). We value the stock at 1xFY14P/B (at 1.05x Mar14 ABV - adjusted for bad and doubtful debt reserves)Initiate coverage on RECL with Mar13 TP of`220 - current valuations are
attractive at 1x FY13E book with dividend yield of c.5% (based on FY13Edividend). We value the stock at 1.1x FY14P/B (at 1.15x Mar14 ABV -adjusted for bad and doubtful debt reserves).
Power Financiers
9 December 2011
India | Banking & Financial Services | Initiating Coverage
Karan Uberoi, CFA,[email protected]
Tel: (91 22) 6630 308
Amey Sathe, [email protected]
Tel: (91 22) 6630 302
Puneet [email protected]
Tel: (91 22) 6630 307
Prashant [email protected]
Tel: (91 22) 6630 306
Ravi Singravi.singh@jmfinancial.
Tel: (91 22) 6630 305
Summary Financials
FY12E FY13E FY
POWF
Net Profit (` mn) 26,021 37,367 44,6Net Profit (YoY) (%) -0.7% 43.6% 19
Loans (` bn) 1,215 1,470 1,Loans (YoY) (%) 22.0% 21.0% 20
ROA (%) 2.2% 2.6% 2
ROE (%) 14.4% 16.8% 17
EPS (`) 19.71 28.31 33
EPS (YoY) (%) -13.6% 43.6% 19
PE (x) 8.5 5.9
BV (`) 157.6 178.5 20
BV (YoY) (%) 17.3% 13.3% 14
P/BV (x) 1.06 0.94 0
RECL
Net Profit (` mn) 27,687 33,558 40,Net Profit (YoY) (%) 7.7% 21.2% 19
Loans (` bn) 994 1,183 1,Loans (YoY) (%) 21.0% 19.0% 19
ROA (%) 2.9% 2.9% 2
ROE (%) 20.2% 21.1% 21
EPS (`) 28.0 34.0 4
EPS (YoY) (%) 7.7% 21.2% 19
PE (x) 6.7 5.5
BV (`) 148.6 172.9 20
BV (YoY) (%) 14.7% 16.4% 16
P/BV (x) 1.26 1.08 0
Source: Company, JM Financial.
JM Financial Research is also availableBloomberg - JMFR , Thomson Publisher & Reut
Please see important disclosure at the end of the re
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Power Financiers 9 December 201
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Catalysts for stock outperformance
Both POWF and RECL have been significant underperformers
Over the last 12 months, POWF and RECL have been significant
underperformers which can be attributed to: a) concerns over asset quality in
the light of mounting losses at SEBs, b) sharp increase in wholesale fund rates,
resulting in margin and spread compression, c) concerns over project
execution and coal availability for power projects.
Exhibit 1. POWF and RECL: Stock performance visavis BSE Bankex
20
40
60
80
100
120
Dec-10 Feb-11 Apr-11 Jul-11 Sep-11 Nov-11
POWF - 1 Year Price Performance (%) BANKEX
20
40
60
80
100
120
Dec-10 Feb-11 Apr-11 Jul-11 Sep-11 Nov-11
RECL - 1 Year Price Performance (%) BANKEX
Source: Bloomberg, JM Financial.
However going ahead, we expect them to outperform given:
a) Significant tariff hikes across SEBs which would improve cash flowsAbsence of tariff revision is one of the key reasons for the poor financial
health of SEBs. However significant tariff hikes over the last 18 months should
lead to improved financials going ahead. Further, 4 states - TN, UP, MP
Rajasthan account for c.70% of the cash losses. Out of these, 3 states have
already raised/proposed to raise tariff while UP will raise tariff post election
early next year.
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Exhibit 2. Recent tariff hikes for SEBsState Date Hike Applicability*
Punjab Apr-10 5-10% Agri / Dom/ Ind
UP Apr-10 13-15% Agri / Dom/ Ind
West Bengal Apr-10 3-8% Agri / Dom/ Ind
HP Jun-10 `0.30-0.50 Dom/ Ind
Tamil Nadu Aug-10 `0.30-1.10 Dom/ Ind
Andhra Pradesh Aug-10 20% IndMaharashtra Sep-10 5% Dom/ Ind
Haryana Sep-10 8% / 40-80% Dom / Comm/ Ind
Karnataka Dec-10 2-10% Dom/ Ind
West Bengal Mar-11 10% Dom/ Ind
Orissa Apr-11 20-40% Dom/ Ind
Punjab May-11 7-12% -
Bihar Jun-11 19% Dom/ Ind
Madhya Pradesh Jun-11 6% Agri / Dom/ Ind
Zharkhand Aug-11 18.5% Dom/ Ind
Delhi Aug-11 22% Dom
Rajastan Aug-11 19-27% Dom/ Ind / Agri
Maharashtra Oct -11 10% Agri / Dom/ Ind
Tamil Nadu* Nov-11 36.5% Agri / Dom/ Ind
Source: JM Financial. * Proposed
b) Decline in wholesale rates
Given our expectation of lower borrowing costs from 1QFY13, we expect these
stocks to outperform going ahead on the back of lower rates which should
improve spreads. As shown below, both POWF and RECL witnessed significant
underperformance since AAA 5 yr yields started increasing from Oct10. This
resulted in compression of spreads from 2.76% in 3Q11 to 2.26% in 2Q12 for
POWF and 3.44% to 3.21% for RECL during the same period.
Exhibit 3. POWF vs India - AAA - 5 Year (LHS) and RECL vs India AAA 5 Year
0
80
160
240
320
400
Feb-07 Dec-07 Sep-08 Jul-09 Apr-10 Feb-11 Nov-11
6.0
7.4
8.8
10.2
11.6
13.0POWF India - AAA - 5 Yr.
0
70
140
210
280
350
Mar-08 Oct-08 Jun-09 Jan-10 Sep-10 Apr-11 Dec-11
6.00
7.40
8.80
10.20
11.60
13.00
RECL India - AAA - 5 Yr.
Source: Bloomberg, JM Financial.
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As shown below, both POWF and RECL witnessed compression in spreads as
borrowing costs (proxy used is AAA 5 yr yield) started increasing from Oct10.
This resulted in compression of spreads from 2.76% in 3Q11 to 2.26% in 2Q12
for POWF and 3.44% to 3.21% for RECL during the same period
Exhibit 4. Quarterly trend in spread for POWF and RECL
2.75% 2.76% 2.76%
2.49%
2.28% 2.26%
2.00%
2.20%
2.40%
2.60%
2.80%
3.00%
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
POWF - Spreads (%) (Reported)
3.35%3.24%
3.44%
3.20%3.10%
3.21%
2.00%
2.50%
3.00%
3.50%
4.00%
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
RECL - Spreads (%) (Reported)
Source: Company, JM Financial.
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Indian Power Sector
Demand Supply gap provides strong growth visibility
India continues to suffer from huge energy deficits
The Indian power sector has been characterised by shortage of supply vis--vis
demand. The deficit in power supply in terms of peak availability and total
energy availability rose continuously from FY04 to FY08. Since then the normalenergy shortage has been hovering between 7 to 9% with peak deficit in excess
of 12%, despite 33% increase in energy supply over the last 5 years. Energy
shortfall coupled with other problems of low factor productivity in generation,
poor management at SEBs, underinvestment in renovation, maintenance and
construction overruns are adding to the woes of Indias power sector.
Exhibit 5. Trends in energy shortfall (power deficit) (LHS) and power deficit rate (%) (RHS)
Energy Shortfall (bn units KWh)
48.139.9 43.3
52.7
66.1 73.3
86.0 84.0
73.1
0.0
20.0
40.0
60.0
80.0
100.0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Normal Deficit (%)
8.8%
7.1% 7.3%8.4%
9.6% 9.9%
11.1%
10.1%8.5%
0%
3%
6%
9%
12%
15%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Source: CEA, JM Financial.
India has relatively low per capita energy consumption
The per capita energy consumption in India is extremely low in comparison to
rest of the world due to unreliable supply and inadequate distribution
networks. In FY09, India's per capita electricity consumption was 597 units
(KWh) per year vs 2,730 units/year world average, 1,884 units in LatAm
countries, 2,648 units in China, and 741 units in Asian countries. According to
Ministry of Power, per capita consumption of energy is projected to increase to
c.1,000 kWh/year by 2012 from current levels (FY09) of 597 KWh/year,
indicating massive scope for scaling up power consumption. The low per capita
consumption of electricity in India compared to world average presents
significant potential for sustainable growth in demand for electric power in
India.
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Exhibit 6. Annual per capita electricity consumption levels (2002-2009)
2373
2659
1208
1534
563 514 421
2730
3278
2648
1884
561 597741
4.0%
5.1%
1.3%2.0%3.0%
3.0%
11.9%
0
800
1,600
2,400
3,200
4,000
World Average Middle East China Latin America Asia Africa India
(KWhper
year)
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%2002 2009 CAGR:2002-09 (%)
Source: Key World Energy Statistics (2011), JM Financial.
Large power deficit to drive significant additional capacity requirement
It is evident that power deficit in India is a significant impediment to economys
development. In this context, bridging the gap in demand and supply has
become critical and consequently, large projects are being undertaken in
different segments of the sector.
Exhibit 7 shows projected installed and incremental capacity requirements in
next two decades. According to Planning Commission, in order to sustain a
GDP growth rate of 8-9%, India would require additional capacity of 67-78 GW
by 2012, 153-182 GW by 2017 and 272-333 GW by 2022 based on normative
power. However, during the last three five year plans (8th, 9th and 10th), India has
managed to achieve barely half of the capacity addition that was planned.
Exhibit 7. Trends in total installed capacity projected (LHS) and incremental capacity required (RHS)
131 153220
306
425
575
778
131 155233
337
488
685
960
0
250
500
750
1000
1250
2003-04 2006-07 2011-12 2016-17 2021-22 2026-27 2031-32
GW
8% GDP 9% GDP
22
6786
119
150
203
24
78104
151
197
275
0
65
130
195
260
325
2006-07 2011-12 2016-17 2021-22 2026-27 2031-32
GW
8% GDP 9% GDP
Source: Planning commission, CSO, JM Financial.
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Leading to huge investment opportunities across Generation and T&D
Generation: In order to match the increasing demand for power
within India, substantial increase in generation capacity along with
more improved transmission and distribution systems will be
required. This will result in significant investment needs which are
estimated at a whopping $236bn (`11.4trn) over FY12-17; of
which $103bn (`5.0trn) in FY12-17 is expected in Generation.
Transmission: The focus on increasing generation capacity over
the next 8-10 years will likely result in a corresponding increase in
investments in the transmission sector. The Ministry of Power
plans to establish an integrated National Power Grid in the country
by FY12 with close to 200,000 MW generation capacities and
37,700 MW of inter-regional power transfer capacity by FY13.
Investment requirement in transmission is estimated at c.`2.4trn
over FY12-17.
Distribution: Additional investment is needed to modernise the
existing capacity, strengthen distribution and MIS network and
improve efficiency of human resources. Investment requirement in
distribution is estimated at c.`4trn over FY12-17.
Exhibit 8. Trends in investment in electricity sector (LHS) and funding requirement in five year plans (` bn) (RHS)
535 570623 715
8201,016
1,264
1,580
1,986
0
500
1,000
1,500
2,000
2,500
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
0%
5%
10%
15%
20%
25%
30%
Investment in Electr icity (` bn) YoY Growth (%)
5,9174,951
1,4002,400
3,0914,001
10,589
11,351
181
0
2,500
5,000
7,500
10,000
12,500
XIth Plan XIIth Plan
Generation Transmission Distribution R&M etc
Source: Planning commission, CSO, JM Financial.
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Share of private players to increase
Increasing share of private sectorShare of private sector in the power industry is expected to rise given that
incremental investment is skewed towards private sector projects as shown
below.
Exhibit 9. Trends in investment in power sector sector wise
78% 72% 65%
22% 28% 35%
$60bn $133bn $171bn
0%
25%
50%
75%
100%
125%
10th Plan 11th Plan 12th Plan
Government Private
Source: Planning Commission, JM Financial
Exhibit 10. Expected capacity addition sector wise
(87 GW)State
18%
Central
25%
Private
57%
Source: CRISIL, JM Financial
The share of the private sector in capaci
expansion has gone up substantially in th
11th Plan and it is expected that 33% of th
total incremental capacity will come from th
private sector. In the 12th Plan, this share
expected to increase further to c.50%.
Source:12th Five Year Plans Approach Paper
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Private sector exposure for POWF and RECL to increase
Given increasing share of private sector projects, proportion of private sector
loans has increased for POWF from 6% in 2Q10 to 9% as of 2Q12 while that for
RECL from 7% in 2Q10 to 11% in 2Q12. We expect private sector exposure to
increase going ahead given the increasing share of private players in the
generation/distribution sector. However, the loan mix for POWF and RECL will
continue to be dominated by State/Central utilities.
Exhibit 11. Quarterly trends in loan mix (borrower wise) for POWF (LHS) and RECL
70% 69% 68% 66% 66% 65% 65% 65% 64%
16% 18% 19% 19% 19% 19% 20% 20% 19%
6% 6% 5% 7% 7% 7% 7% 8% 9%
0%
20%
40%
60%
80%
100%
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
State Sector Central Sector Joint Sector Private Sector
84% 84% 84% 86% 86% 84% 83% 82% 82%
10% 9% 9% 7% 7% 7% 7% 7% 7%
7% 6% 6% 7% 7% 9% 10% 11% 11%
0%
20%
40%
60%
80%
100%
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
State PSUs Private
Source: Company, JM Financial.
Exhibit 12. Quarterly trends in disbursements (LHS) and sanctions mix (sector wise) for POWF
54% 57%66%
53%
77% 70% 68% 67% 66%
31% 29%23%
21%
7% 16% 21%7% 9%
5% 4% 3%
21%
11% 9% 5%19%
21%
0%
20%
40%
60%
80%
100%
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
State Sector Central Sector Joint Sector Private Sector
30%
54%
83%
49%
79% 76%91%
80%90%
27%46%
17%
34% 21% 24%
9% 16% 8%
0%
20%
40%
60%
80%
100%
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
State Sector Central Sector Joint Sector Private Sector
Source: Company, JM Financial.
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Power Financing Sector
Competitive intensity to moderate
Power sector financing has been a highly competitive industry
Power financing NBFCs have been facing competition from large SOE banks
and private sector banks. Relatively better spreads, large ticket size loans and
secured nature of loans attracted a lot of competition from the banking sector.
Over FY05-3Q11, banking sector witnessed loan CAGR of c.38% to the power
sector vs 25% and 22% loan CAGR of RECL and PFC respectively. Consequently,
banking sector improved its market share from 41.5% in FY05 to 56.9% in
2Q12.
Exhibit 13. Trend in market share of RECL, PFC and banking sector
Market Share (%) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 1Q12 2Q
Banks* 29.0% 30.7% 41.5% 49.7% 46.4% 47.9% 49.2% 53.6% 56.4% 57.4% 56.
REC 30.8% 30.6% 23.5% 20.9% 20.4% 19.8% 20.3% 18.9% 17.2% 16.9% 17.
PFC 40.2% 38.7% 32.1% 29.4% 27.8% 26.0% 25.5% 22.7% 20.8% 20.4% 20.
IDFC NA NA 2.9% 0.0% 5.4% 6.3% 4.9% 4.8% 5.6% 5.3% 5.
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0
Source: RBI, JM Financial.
Sectoral limits, ALM and exposure norms to reduce competitive intensity
Going forward, we expect competitive intensity of power financing sector to
moderate due to various constraints faced by the banking sector such as:
Sectoral limits: Generally banks have internal sectoral limits at
15-20% of gross advances for each sector, beyond which they
dont lend. Given the strong lending rate towards this sector, most
banks are nearing their sectoral limit. Consequently, banks are
likely to moderate their exposure towards the sector.
ALM mismatch:Banks have a typical liability profile of 2-3 years
whereas infrastructure financing is required for 10-15 years and
beyond. This creates ALM mismatch for banks and banks are
facing incremental problems in raising such resources. However,
certain recent initiatives directed towards take out financing (still
in nascent stage) and setting up of infrastructure debt fund will
likely ease the situation for banks. Exposure norms: Single and group exposure limits set by RBI
create problems for large projects as banks can lend only 20% and
35% of its capital funds to single and group borrowers. Most
banks are facing constraints to lend further as they have already
reached the maximum group exposure limit for such borrowers.
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RBI has classified POWF and RECL as Infrastructure Finance Company (IFC),
benefits of the same are as under:
Lower cost of borrowings: IFCs would benefit from a lower risk
weight on their bank borrowings (from a flat 100% to as low as
20% for AAA rated borrowers). So, cost of borrowings will come
down for AAA rated companies. Both, POWF and RECL are AAA
rated companies.
Higher borrowing limit from banks, IFC to get higher share of
funding: New guideline has allowed for less restrictive caps on
bank lending to NBFCs. Now for an infra-NBFC, banks can lend up-
to 20% of their net worth vs. 15% earlier. Hence, going forward,
there is a 33% increase in lending capacity that IFCs can access
additionally.
Easy access to ECB: IFCs are eligible to raise, under the automatic
route, ECBs up to $500mn each fiscal year, subject to the
aggregate outstanding ECBs not exceeding 50% of owned funds.
Higher exposure to single and group party borrowers (assets
side): IFCs can have higher exposure to group (50% owned funds
vs 35% earlier) and individual borrowers (30% vs 20%). This will
benefit POWF as then it will be in a position to underwrite largeprojects on its own.
Exhibit 14. IFC vs Banks / NBFC
Concentration of credit / investment
Normal Loans Infra Loans
Lending ceilings
Lending to any single borrower 15.0% 20.0% 25.0%
Lending to any single group of borrowers 25.0% 35.0% 40.0%
Investing ceilings
Investing in shares of a company 15.0% 20.0% 15% ( +5*)
Investing in shares of a single group of companies 25.0% 35.0% 25% ( +10*)
Loans and investment taken together
Lending and investing to single party 25.0% 30.0% 30.0%
Lending and investing to single group of parties 40.0% 50.0% 50.0%
Loan company
The maximum exposure ceilings
IFC
Source: RBI, JM Financial. * Additional exposure applicable in case the same is on account of infrastructure loan and/or investment.
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POWF and RECL to witness healthy 21% and 20% CAGR in loan book over
FY11-14E
Given the advantages IFCs like POWF, RECL enjoy over banks which are
restricted due to exposure limits, ALM mismatch, we expect POWF and RECL to
gain market share in power financing from banks. We expect POWF and RECL to
witness healthy 21% and 20% CAGR in loan book over FY11-14E on the back of
17% CAGR each (i.e. both POWF and RECL) in disbursements over FY11-14E.
Exhibit 15. Trends in loan book and loan growth for POWF (LHS) and RECL
Source: Company, JM Financial.
356 439516
644799
996
1,215
1,470
1,764
0
450
900
1,350
1,800
2,250
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
15%
17%
20%
22%
25%
27%Loan Book (` bn) YoY Growth (%)
FY11-14E CAGR: 21%
FY06-11 CAGR: 23%
253321
393514
665
821
994
1,183
1,407
0
350
700
1,050
1,400
1,750
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
10%
15%
20%
25%
30%
35%Loans (` bn) YoY Growth (%)
FY11-14E CAGR: 20%
FY06-11 CAGR: 27%
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Asset quality: SEB default unlikely
Asset quality risks for POWF and RECL have increased given the deteriorating
financial health of SEBs. SEBs have been under financial distress due to a) Non-
revision of tariffs, b) Nonpayment of subsidies from State Governments, c) High
merchant power rates, d) High AT&C/distribution losses. Consequently, cash
losses (revenue and subsidy realised basis) for SEBs in FY10 were c.`444bn from
c.`88bn in FY06.
Exhibit 16. Trend in cash profit/losses on revenue and subsidy received basis
(` bn) (Discoms)
-88.3-128.8
-166.1
-369.7
-444.0-500.0
-400.0
-300.0
-200.0
-100.0
0.0
FY06 FY07 FY08 FY09 FY10
SEBs - Total Losses
Source: Company, JM Financial.
4 states account for 70% of SEBs losses
4 states Tamil Nadu, Rajasthan, Uttar Pradesh and Madhya Pradesh account
for c.70% of the losses (revenue and subsidy realised basis). The total loss for
these 4 states was c.`311bn in FY10 while for all SEBs combined; it was
`444.0bn.
Exhibit 17. Trend in cash profit/losses on revenue and subsidy received basis
(` bn) (Discoms)(` bn) FY06 FY07 FY08 FY09 FY10Tamil Nadu -5.4 -9.0 -31.1 -71.1 -97.9
Madhya Pradesh -1.8 -13.0 -21.4 -42.4 -36.2
Rajasthan -5.1 -3.0 -31.1 -67.2 -109.8
Uttar Pradesh -46.6 -48.8 -52.9 -55.9 -67.1
Total losses of 4 States -58.9 -73.8 -136.4 -236.6 -311.0
SEBs - Total Losses -88.3 -128.8 -166.1 -369.7 -444.0
(%) Proportion FY06 FY07 FY08 FY09 FY10
Tamil Nadu 6.1% 7.0% 18.7% 19.2% 22.1%
Madhya Pradesh 2.0% 10.1% 12.9% 11.5% 8.2%
Rajasthan 5.8% 2.3% 18.7% 18.2% 24.7%
Uttar Pradesh 52.8% 37.9% 31.8% 15.1% 15.1%
Total 66.7% 57.3% 82.1% 64.0% 70.0%
Source: Company, JM Financial.
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These 4 states also accounted for c.43% of SEBsborrowings as of FY10.
Exhibit 18. Trend in borrowings of SEBs from FIs/banks/bondsSEB Borrowings (` bn) FY06 FY07 FY08 FY09 FYLoan from FIs/ Banks/ Bonds 1,109 1,287 1,548 1,985 2,6
Top 4 loss making states Borrowings (` bn)
Loan from FIs/ Banks/ BondsTamil Nadu 93 116 146 215 3
Uttar Pradesh 117 147 149 180 2
Rajasthan 138 164 226 321 4
Madhya Pradesh 34 43 50 75 1
Total 453 565 702 952 1,3
Top 4 loss making states Borrowings (%)
Loan from FIs/ Banks/ Bonds
Tamil Nadu 8.4% 9.0% 9.4% 10.8% 12.
Uttar Pradesh 10.5% 11.4% 9.6% 9.1% 9.
Rajasthan 12.4% 12.7% 14.6% 16.2% 17.
Madhya Pradesh 3.0% 3.4% 3.2% 3.8% 4.
Total 34.4% 36.6% 36.9% 39.8% 42.9
Source: PFC, JM Financial
SEBs: Financial performance to improve going ahead
Discoms: Tariff hikes to lead to improvement in financial health
Absence of tariff revision is one of the key reasons for the poor financial health of
SEBs. Mounting losses at SEBs notwithstanding, we feel their financials will
improve going ahead given a) 5-40% tariff hike across states in last 18 months
(Exhibit 19). Further, 4 states - TN, UP, MP Rajasthan account for c.70% of the
cash losses. Out of these, 3 states have already raised/proposed to raise tariffwhile UP will raise tariff post election early next year. b) Agriculture tariffs have
been rising post elections in 2009 (Exhibit 14); decline in agriculture tariff was a
key contributor to the under recoveries of distribution companies (Discoms). c)
APTEL facilitating suo-motu tariff increase by the regulator. d) Declining power
purchase costs. e) POWF categorisation signals improvement. f) Increasing
pressure from lenders to improve the finances by raising tariffs/improving
efficiency. These measures are a step in the positive direction and we believe SEB
finances will improve going ahead. Consequently, we do not expect any SEB
default for POWF and RECL, although there could be some restructuring without
any significant NPV loss.
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a) 5-40% tariff hikes across states over the last 18months
Absence of tariff revision is one of the key reasons for the poor financial
health of SEBs. However, recently we saw tariff hikes across almost all SEBs
driven by increasing pressure from the lenders to improve the finances of
SEBs. Further, 3 of the 4 states (TN, UP, MP, Rajasthan) that account for c.70%
of cash losses have already raised/proposed to raise tariff while UP will raise
tariff post election early next year .This is a step in the right direction which
should help improve cash flows of SEBs.
Exhibit 19. Recent tariff hikesPrevious hikes
State Date Hike Applicability*Date Quantum
Remarks
Punjab Apr-10 5-10% Agri / Dom/ Ind Sep-09 9-19% NA
UP Apr-10 13-15% Agri / Dom/ Ind FY10 unknown BPL exempted, but rural tariffs hiked
West Bengal Apr-10 3-8% Agri / Dom/ Ind Nov-09 20-25%
HP Jun-10 `0.30-0.50 Dom/ Ind - - SME and BPL exempted
Tamil Nadu Aug-10 `0.30-1.10 Dom/ Ind - - After 7 years to flat tariffsSME and agri consumers exempted
Andhra Pradesh Aug-10 20% Ind - - Opposed by industries
Maharashtra Sep-10 5% Dom/ Ind - -BPL exemptedConsistent increase twice an year
Haryana Sep-10 8%/40-80% Dom / Comm/ Ind - - Steep increase after >10 years
Karnataka Dec-10 2-10% Dom/ Ind Nov-09 8-25%Next hike in Summer of 2011 of c.12%; Higincreases for industry and heavy domesticusers
West Bengal Mar-11 10% Dom/ Ind Jul -10 11%CESC proposes power tariff hike to WestBengal government in August11
Orissa Apr-11 20-40% Dom/ Ind 2009-10 30% After 9 years of flat tariffs
Punjab May-11 7-12% - - - NA
Bihar Jun-11 19% Dom/ Ind 2009-10 - Proposed increase in tariff rates of 65% withhike in all categories of consumers
Madhya Pradesh Jun-11 6% Agri / Dom/ Ind 2009-10 10% NA
Zharkhand Aug-11 18.5% Dom/ Ind 2009-10 - Demanded for a 100% increase in tariff
Delhi Aug-11 22% Dom - - NA
Rajastan Aug-11 19-27% Dom/ Ind / Agri - -Hike done against election manifesto of notincreasing tariffs for 5 years for agri
Maharashtra Oct -11 10% Agri / Dom/ Ind 2010-11 5%Power surcharge of 9% instead of effecting full-fledged tariff hike
Tamil Nadu** Nov-11 36.5% Agri / Dom/ Ind 2010-11 40%42% to domestic users, 19% to industrial usand 589% to agricultural users.
Source: SERC, JM Financial * Note: Dom Domestic; Ind Industrial; Agri Agricultural; Comm Commercial, ** Proposed
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b) Agricultural tariffs increasingFY09 financials were impacted by pre-election spending largesse (Exhibit 14)
wherein agricultural tariffs dipped from Mar-Aug09. We believe this could
have been a key contributor to the under recoveries of Discoms as agri-
consumers account for a large chunk of vote-bank. Since then, agricultural
tariffs have gone up by c.16%. Recently TANGEDCO, the Tamil Nadu power
distribution company, submitted a petition to raise power tariff by 589% to
agricultural users.
Exhibit 20. Agriculture tariffs trend* upwards (p/kWh)
90
98
106
114
122
130
Apr'05 Oct'05 Apr'06 Oct'06 Apr'07 Oct'07 Apr'08 Oct'08 Apr'09 Oct'09 Apr'10 Oct'10 Apr'11
Source: Ministry of Commerce & Industry, JM Financial * Base: Apr04
c) Distribution reforms finally kicked-offWith mounting SEB losses, government bodies have realised the importance
of further reforms in last-mile connectivity. GoI is planning VGF (viability gap
funding) based schemes for incentivising privatisation in distribution and
providing loans (convertible to grants) for reducing T&D losses via R-APDRP.
PMO has setup VK Shunglu committee and CERC ordered studies on financial
viability of SEBs (CRISIL recommending c.20% increase in tariffs in many
states).
Forum of Regulator (FoR) has standardised distribution franchisee (DF) model
bidding documents and as many as 14 states have floated tenders for DF
circles after successful experience at Bhiwandi. UP has awarded DF for Kanpur
and Agra, while Nagpur, Maharashtra and Patna, Bihar were recently awarded.
Few states like MP and Rajasthan are also progressing with DF (Exhibit 21).
Agricultural tariffs have risen 18% over la
2 years
Recommendations from VK Shunglu
Committee setup by PMO and CERC to
improve SEB is due anytime
Pre-election tariff drop
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Exhibit 21. DF circles under awardState AT&C Losses Circle Award Date
UP 40% Kanpur Torrent Power
Agra Torrent Power
Bareily Sep-09
Meerut Sep-09
Varanasi Sep-09
Gorakhpur Sep-09Moradabad Sep-09
Allahabad Sep-09
Aligarh Sep-09
Maharashtra 31% Nagpur Spanco
Aurangabad Jan-10
Jalgaon Jan-10
Kalyan Jan-10
Dhule Jan-10
Bhiwandi Torrent Power
Uttarakhand 35% Roorkee Jan-10
Rudrapur Jan-10
MP 61% Narsinghpur Apr-10
Guna
Rajasthan 30% Jaipur Sep-09
Bihar 59% Patna CESC Jan-10
Gaya
Muzaffarpur
Bhagalpur
Meghalaya 43% Rural Areas Jul-10
Source: States, JM Financial
Impact of distribution reforms has been very positive with two prominentexamples of NDPL in Delhi and Torrent in Bhiwandi. Since privatisation, the
AT&C losses in NDPL areas have declined to record lows of 13.2% in FY11 as
against 53% in FY03. Similarly in Bhiwandi, Torrent has been able to bring
down T&D losses to 18.0% in FY11 from 49% in FY06.
Exhibit 22. Impact of distribution reforms in Delhi and Bhiwandi
53%
13%
0%
14%
28%
42%
56%
70%
FY03 - Pre-reform FY11 - Post-reform
NDPL - Delhi (AT&C Losses (%))
49.0%
18.0%
0.0%
16.0%
32.0%
48.0%
64.0%
FY06 - Pre-reform FY11 - Post-reform
Torrent - Bhiwandi (T&D Losses (%))
Source: Company, JM Financial.
As per industry checks 14 states have
released proposals for DF
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d) Declining power purchase costsWith merchant tariffs coming down significantly and introduction of
competitive bidding regime for power purchase, the cost for State Discoms is
likely to come down. At present UP, Rajasthan, Punjab and Haryana buy >10%
of their power share from ST market. With average rate declining from over
`7/unit to `3.5-4.0/unit, state discoms are likely to benefit in the
short/medium term.
Exhibit 23. ST Market contribution
2.
43.
2
4.
5
5.
6
5.
3
4.
7
4.
1
7.
5
5.
0
3.
7
3.
1
7.
3
0.0
2.0
4.0
6.0
8.0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12E0
2
4
6
8
10% ST market (RHS)
Power Exchanges
Bilateral trades
Source: CEA, CERC, JM Financial
e) POWF categorisation signals improvementPFC rating of SEBs signals significant improvement in FY10 as Power utilities
in best rated category (A+) doubled with only one addition to the lowest
rating category (Exhibit 19). This trend, we believe, points to the impact of
marginal reforms (including tariff increases) and optimisation of purchase
costs kicking in the system.
Exhibit 24. State power utilities categorisation by PFC
Source: PFC, JM Financial
Most states are in-line with financial targe
recommended by 12th FC with debt/GSDP
reduction in last 5 years
Recommendations by recent action of PMO
and CERC to improve SEB is due in Feb11
Quality RTC power is available to Discoms
at sub`4/kWh rate
Though C rated SEBs ballooned in FY09, A
rated SEBs have been increasing in last 2
years
5 420 21
1016 18
25 20
28
30 30
3329 315 6
10 20 26
0
1020
30
40
50
60
70
80
90
100
FY07 FY08 FY09 FY10 FY11
C B A A+
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f) APTEL judgement for revision of tariffs on Suo-motubasis
Appellate Tribunal for Electricity (ATE) recently ruled that state electricity
regulators indeed have the power to initiate tariff revision on a suo motu basis
if discoms do not file annual revenue requirement petition within the
stipulated time. With this regulators will be held responsible for delay in tariff
revision if discoms do not file petition to raise tariffs. If implemented, this will
help improve the financial health of SEBs.
Improving fiscal health of State Finances
1. Significant turnaround is expected in fiscal position of StateGovernments
Over the past two years, the consolidated fiscal position of the States
deteriorated significantly. Key fiscal indicators suffered a setback in FY09
and FY10 as States implemented the recommendations of the Sixth
Central/State(s) Pay Commissions and also undertook various
discretionary fiscal measures to moderate the impact of the overall
macroeconomic slowdown. The progress in terms of fiscal consolidation
till FY08 had created a space for the expansionary fiscal stance at theState level. Further, additional market borrowings up to 0.5% of States
GSDP each in FY09 and FY10 were allowed by the Centre.
However, a significant turnaround is anticipated in the fiscal position of
State governments FY11 onwards as a) Improvement in the revenue
account would mainly come through lower growth in revenue
expenditure. b) Committed expenditure as a ratio to revenue receipts is
expected to decline. c) Lower growth in capital outlay. d) Absence of
oneoff expenditure such as sixth pay commission and discretionary
fiscal measures.
Exhibit 25. consolidated position of state finances (%) (LHS) and trend in position of state finances fiscal deficit
GSDP (%)
2.8%
3.4%
4.0%
2.4%
1.8%1.5%
2.4%
3.3%
2.5%
0%
1%
2%
3%
4%
5%
1990-
95*
1995-
00*
2000-
05*
FY06 FY07 FY08 FY09 FY10 FY11E
Gross Fiscal Deficit (%)
0.0%
1.4%
2.8%
4.2%
5.6%
7.0%
UP
Rajasthan W
B
Punjab
MP
AP
Gujrat
Ma
harashtra
Karnataka T
N
Haryana
2005-08* FY09 FY10 FY11BE
Source: Company, JM Financial. * Average
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2. Improvement in State financials may support subsidiesIn order to gauge risks of future payables and power subsidisation, we have
analysed fiscal position and debt burden of key states. UP, WB, Rajasthan and
Punjab have high debt levels vs 12th Finance Commission (FC) target of 30.8%
(Exhibit 26). However, compared to historical levels, debt/GSDP improved for
most states during 2006-10 (Exhibit 27). In terms of fiscal deficit almost all
states are below the 12th FC target levels (3%) except UP and Punjab. The
deficit, in our view, is yet to reach an alarming proportion to predict financialdistress in the near-term and hence, power subsidies may continue to fund
losses/free power in the meantime. Having said that, we believe immediate
steps need to be taken to reduce the subsidy burden in states like Rajasthan
(>17% of total state expenditure).
Exhibit 26. Consolidated position of state finances (%) (LHS) and trend in position of state finances Fiscal deficit
GSDP (%)
0.0%
12.0%
24.0%
36.0%
48.0%
60.0%
UP
Rajasthan W
B
Punjab
MP
AP
Gujrat
Maharashtra
Karnataka T
N
Haryana
2005-08* FY09 FY10 FY11BE
0.0%
1.4%
2.8%
4.2%
5.6%
7.0%
UP
Rajasthan W
B
Punjab
MP
AP
Gujrat
Maharashtra
Karnataka T
N
Haryana
2005-08* FY09 FY10 FY11BE
Source: Company, JM Financial. * Average
Exhibit 27. Trend in position of state finances debt to GSDP (%)
FY06 FY07 FY08 FY09 FY10 FY11EReduction in Debt/GSDP
from FY06FY11E
AP 35 34 32 29 30 31 4
Gujarat 38 36 33 33 32 31 7
Haryana 25 23 20 18 19 19 6
Karnataka 27 29 26 24 24 25 2
MP 43 40 39 35 34 37 6
Maharashtra 33 32 27 27 25 27 6
Punjab 47 42 40 37 35 34 13
Rajasthan 52 48 45 42 41 41 11
TN 27 25 24 25 26 25 2UP 56 54 52 47 43 46 10
WB 50 47 45 43 43 41 9
Source: RBI, JM Financial
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What happened in FY01-03 when SEB dues wererestructured?
In March 2001, government appointed an expert group headed by Mr. Montek
Singh Ahluwalia to examine various issues in the power sector. The group came
up with two reports one on settling the outstanding dues of the state electricity
boards and one on restructuring these SEBs. It proposed a scheme for settlement
of outstanding dues of SEBs, linked to a mechanism that would ensure payment ofcurrent dues in future. The groups recommendations included a package of
incentives and disincentives linked to commercial discipline and initiation of a
process of reforms. At that time SEBs had accumulated dues of `415bn,
consisting of`257bn of principal and`157bn of interest/surcharge.
RECL was not included in the scheme of things RECL and POWF were not
included in the scheme because dues to these organisations were on capital
account. As a matter of principle, group felt that scheme should not go into
the recovery or rescheduling of loans given by financial institutions. These
must be left to the respective lenders and borrowers.
However, RECL was allowed one-time settlement The group felt that
having regard to the predominantly social orientation of RECL lending, thebenefit of one-time settlement could also be extended to the outstanding dues
of RECL. The Group recommended that the Ministry of Power, which is the
administrative Ministry responsible for RECL, may consider advising RECL to
settle its dues on a similar basis as the scheme proposed by the Group. The
Ministry of Power could also take a view whether the States owing overdues to
RECL should be required to settle with RECL before the benefit of this scheme
is extended to them.
What RECL did?
In FY03FY05:
Overdues of Madhya Pradesh SEB were settled by a rescheduled
package involving the issue of bonds of`14.15bn by the Governmentof MP, bearing 8% interest rates. In FY04, RECL had (calculated) yield
on loans of 10.7%. Balance of`3.35bn was payable by MP SEB in
installments as per MOU.
Overdues from Jharkhand SEB were fully settled through cash
payment of`1.7bn.
Overdues from Assam SEB and Bihar SEB were also re-scheduled
during FY05.
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State Power Ministers Conference on DistributionSector Reforms: Actions will speak louder thanwords
The State Power Ministers Conference on Distribution Sector Reforms underlined
the need for urgent steps to arrest and reverse the growing losses in power
distribution. State governments unanimously decided to bring down commercial
losses and ensure financial sustainability of discoms and state utilities. TheConference agreed upon a set of measures to bring down the distribution losses.
We analyse impact of the same on power financing sector if timely and efficient
implementation is ensured.
Exhibit 28. Resolutions passed in State Power Ministers Conference on Distribution Sector Reforms
Adopted Resolution Impact if timely and efficient implementation is ensured
1. The state governments to ensure audited accounts of SEBs up to the FY10
- Also ensure that the accounts for a year are audited by September of the next
financial year and computerization of accounts would be undertaken on priority.
Will ensure better and timely data availability regarding financial position
of SEBs
2. The states would ensure that the distribution utilities file their Annual Tariff
Revision Petition every year, by December January of the preceding financial year
to the State Regulators as stipulated by the National Tariff policy.
To increase visibility SEB's financial performance
3. The Annual Tariff Revision Petition would be filed before the SERC and states will
ensure that the difference between ARR and ACS is positive to generate internal
surpluses.
To improve financial position of SEBs hence reducing funding requirement
of PFC, REC and banking sector
4. The state governments would ensure automatic pass through in tariff for any
increase in fuel cost by incorporating the same in the regulations, as provided in
Section 62(4) of Electricity Act, 2003.
Lead to automatic passing on of increased cost, helping SEBs to maintain
profitability
5. The state governments would not only clear all the outstanding subsidies to the
utilities, but ensure advance payment of subsidy as per the Section 65 of the
Electricity Act, 2003 in future.
To solve the problem of timely repayment and nullify risk of default by SE
6. The eligibility criteria for inclusion of towns under R-APDRP assistance with
population of 30,000 (10,000 for special category states) should be reduced to
15,000 (5,000 for special category states).
May result in marginal reduction in AT&C losses
7. The state governments would ensure payment of all outstanding dues from
various departments of state government and institutions to the distribution
utilities or release payments from the State budget directly.
Equivalent of State Government's sovereign guarantee of loans
8. The state governments would consider converting loans due from the state
governments to the distribution utilities as state government equity to ensure
capital infusion and improvement in net worth of utility.
To improve D/E ratio of SEBs and consequently overall financial position o
DISCOMs
9. The state governments would take effective steps to reduce AT&C losses to less
than 15%.To reduce AT&C losses if implemented properly
10. States would immediately initiate steps to appoint distribution franchises in
urban areas through competitive bidding.To improve operating efficiency of SEBs
11. States would immediately invite bids for meeting the uncovered generation
capacity gap viz- a -viz the requirement in their States by the end of 12th Plan. The
process will be completed by March, 2012.
To identify additional generation requirement; however there is already to
much of demand supply gap in generation
12. States would create a unit in their states for integrated planning of generation,transmission and distribution to meet the future requirement of their states.
Another layer of administration may not benefit much
Source: Company, JM Financial.
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Fuel availability: Key Risk
Domestic coal unavailability to restrict power supplies
a) Domestic coal availability uncertain: Coal supply has been severelyhampered as new mine projects face delays in environmental clearance.
Although, CEA has taken up the issue with MoP and planning commission, the
authority has mentioned non availability of additional coal for thermal units
commissioned/expected to be commissioned during 2010-11 and 2011-12.
Based on the analysis of coal linkages and expansion projects of CIL, SCCL we
have extremely limited visibility of when domestic coal supply is likely to
come through. CIL has already revised its production target for FY11-12 from
480mnT/521mnT to 440mnT/447mnT. While domestic coal availability is
increasing by a muted 3-4%, power generation capacity addition is growing at
8-9% p.a.
b) Infrastructure bottlenecks: Based on MoP estimates, 270mtpa of importedcoal will be required to meet 12th plan targets (215GW of coal based capacity).
However, lack of logistics infrastructure (port issues, wagon shortage, railway
infrastructure issues) does not give us confidence of such scale of imports in
India.
c) Blending limitation in existing plants: Our channel checks indicate thatboilers of existing coal-based stations are not designed to consume imported
coal in more than 10-15% blending and hence, imported coal cannot be relied
upon to make for domestic shortfalls.
d) Inflationary concerns to discourage high-cost imported coal blending:10% blending leads to c.`0.40/unit increase in costs for discoms. Given
inflationary concerns and limited ability of bleeding discoms to pass higher
power purchase cost to customers, we expect much lesser coal imports to
materialise (JMFe c.80mtpa vs CEA estimates 270mtpa by FY17).
e) leading to international acquisition spree: As domestic fuel availability isconstrained, IPPs have recently started acquiring unexplored resourcesinternationally (Exhibit 43). Although associated development costs are high
in most cases, fuel security is a must for larger capex back home for power
projects.
f) However international coal prices are rising post new laws in Indonesiaand Australia: Indonesia (the largest coal supplier) has said it would not
allow exporting companies to sell coal at prices below notified rates after
September 23, 2011 i.e. annual alignment of coal prices with international
rates. Australia also issued a draft mining law to impose levy on coal and iron
ore projects from next year (FY12) as miners in Australia would like to pass
on the increase in levies to consumers. Indonesia and Australia contribute
c.55% of India's coal imports. The current contractual framework does not
protect power companies from coal price changes triggered by any change inlaw in the exporting country. As mentioned earlier, reliance on imported coal
will be going up in coming years but prices of imported coal also have been
rising putting significant upward pressure on the cost of power generation.
Given SEBs financial state and increasing awareness of high purchase cost, we
have witnessed significant backing down of plants on lower offtake by SEBs
Therefore possibilities of renegotiation of competitively bid Power Purchase
Agreements (PPAs), where fuel price risk is not covered, cannot be ruled out.
Domestic fuel unavailability remains the
single biggest challenge
Imported coal based power has limited
acceptability
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Negatives priced in
Loan book to register 21% CAGR for FY11-14E: POWF delivered robust loan
book CAGR of 23% for FY05-11. Given outstanding sanction of`1.7trn (1.6xFY11 loan book) and investment pick-up in FY12 (being the last fiscal of the
11th five year plan), we expect 18%/17%/17% disbursement growth in
FY12/FY13/FY14, leading to loan book CAGR of c.21% for FY11-14E.
Equity issuance to lead to stable margins in FY12E:We expect 14bps decline
in spreads for POWF in FY12E and stable spreads over FY11-14E given a)
increase in borrowing cost by 65bps over FY11-14E, b) company has a
marginally negative repricing schedule of`30bn i.e. excess of loan liabilities
(`230bn up for re-pricing) over loan assets (`200bn). Thus we expect POWFs
spreads to decline by 14bps to 2.1% in FY12E and improve to 2.27% over FY12-
FY14E (on lower borrowing costs). We expect margins to remain stable over
FY11-14E, leading to 23% CAGR in NII over FY11-14E.
Higher exposure to generation is comforting factor, conservatively model
14bps of credit costs; reserves for bad debts (1% of loans) should act as
buffer: POWF has c.84% of the loans towards generation companies which are
much better financially positioned than distribution and transmission
companies which form c.13% of POWFs book. However, given risks gencos face
from poor financial health of state-owned discoms, we conservatively factor
14bps of credit costs for FY13E and 14E. Further, POWF maintains reserve for
bad debts (c.1% of O/S loan book) which should act as a buffer in case of any
restructuring/NPLs.
Solid 20% net profit CAGR over FY11-14E with ROE of c.18%: We expect
earnings CAGR of 20% over FY11-14E driven by 23% CAGR in NII on the back of
robust loan book CAGR of 21%; however, we have modeled elevated credit
costs (14bps in FY14E vs 4bps in FY11). Return ratios should remain healthywith ROA of 2.6% and ROE of 18% in FY14E.
Current valuations at 0.95x 1yr fwd book (down from a peak of 2.9x);initiate coverage with BUY and TP of `205: POWF has witnessed significantde-rating from peak multiple of 2.9x 1yr fwd book to 0.95x currently. We
believe current valuations are attractive at 0.9x FY13E book with dividend yield
of c.5% (based on FY13E dividend). We value the stock at 1x FY14P/B (at 1.05x
Mar14 ABV; adjusted for reserves for bad and doubtful debt), implying Mar13
target price of`205, upside of c.30%, including dividend.
Karan Uberoi, CFA, [email protected]
Tel: (91 22) 6630 3082
Amey Sathe, [email protected]
Tel: (91 22) 6630 3027
Puneet [email protected]
Tel: (91 22) 6630 3072
Prashant [email protected]
Tel: (91 22) 6630 306
Ravi [email protected]
Tel: (91 22) 6630 306
Key Data
Market cap (bn) `234.1 / US$ 4.
Shares in issue (mn) 1319.
Diluted share (mn) 1319.
3-mon avg daily val (mn) `603.0/US$ 11.
52-week range `339.5/130.
Sensex/Nifty 16,805/5,03
``/US$ 51.
Daily Performance
Power Finance Corp.
0
80
160
240
320
400
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
-60%
-40%
-20%
0%
20%
40%
P ower F inanc e C orp. R elat iv e t o Sens ex (R HS)
1M 3M 12M
Absolute 8.0 21.3 -45.
Relative* 12.3 20.8 -30.
* To the BSE Sensex
Shareholding Pattern (%
2Q FY11 2Q FY1
Promoters 89.78 73.7
FII 3.76 6.4
DII 2.99 10.1
Public/others 3.47 9.7
Power Finance Corp. | POWF IN
India | Banking & Financial Services | Initiating Coverage
Price:`164
BUY
Target:`205 (Mar13)
JM Financial Research is also available oBloomberg - JMFR ,Thomson Publisher & Reuter
Please see important disclosure at the end of the repo
9 December 2011
Exhibit 29. Financial Summary (` mn)Y/E March FY10 FY11 FY12E FY13E FY14ENet Profit 23,573 26,196 26,021 37,367 44,663
Net Profit (YoY) (%) 19.7% 11.1% -0.7% 43.6% 19.5%
Assets (YoY) (%) 24.3% 25.9% 20.7% 20.7% 19.8%
ROA (%) 3.08% 2.73% 2.21% 2.63% 2.61%
ROE (%) 18.8% 18.2% 14.4% 16.8% 17.7%
EPS (`.) 20.5 22.8 19.7 28.3 33.8
EPS (YoY) (%) 19.7% 11.1% -13.6% 43.6% 19.5%
PE (x) 8.1 7.3 8.5 5.9 4.9
BV (`.) 116.2 134.3 157.6 178.5 203.6
BV (YoY) (%) 13.9% 15.6% 17.3% 13.3% 14.0%
P/BV (x) 1.44 1.24 1.06 0.94 0.82
Source: Company data, JM Financial. Note: Valuations as of 08/12/11.
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Exhibit 29. Key Financials
Key Parameters FY06 FY07 FY08 FY09 FY10 FY11 FY12E
Balance sheet
Borrowings (`bn) 269 336 406 522 671 856 1,014
Loans (`bn) 356 439 516 644 799 996 1,215
Total Assets (` bn) 375 467 548 683 849 1,068 1,290 Assets Growth (%) 20.5% 24.5% 17.2% 24.7% 24.3% 25.9% 20.7%
Income statement
NII (`bn) 12.3 14.4 18.0 22.9 28.6 33.3 41.6
Operating profits (`bn) 12.2 14.2 18.1 22.6 28.7 34.5 42.3
PAT (`bn) 9.7 9.9 12.1 19.7 23.6 26.2 26.0
Profitability
Interest Spread (%) 2.10% 1.96% 2.01% 2.24% 2.46% 2.27% 2.13%
NIM (%) 3.74% 3.57% 3.72% 3.92% 3.91% 3.64% 3.68%
ROA (%) 2.83% 2.34% 2.38% 3.20% 3.08% 2.73% 2.21%
ROE (%) 13.3% 10.9% 11.6% 17.5% 18.8% 18.2% 14.4%
Asset Quality
Gross NPL (`mn) 910 420 132 132 132 2,307 3,336
Gross NPL (%) 0.26% 0.10% 0.03% 0.02% 0.02% 0.23% 0.27%
Net NPL (`mn) 698 260 70 60 62 1,946 2,502
Net NPL (%) 0.28% 0.11% 0.03% 0.02% 0.02% 0.26% 0.30%
Loan Loss Charge (`mn) -31 -48 -102 22 -6 318 935
Coverage (%) 23.3% 38.1% 46.8% 54.4% 52.6% 15.6% 25.0%
Source: Company, JM Financial, Note: * Figures for ratios signify change over the specified period.
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Sanctions at 1.6x loan book size provide growthvisibility over FY11-14E
Outstanding sanction at `1.7trn (1.6x of the loan book) provides stronggrowth visibility
The robust demand for power financing has been reflected in strong sanctions
and disbursement pipeline for POWF. Sanctions witnessed 26% CAGR and
disbursements 24% CAGR over FY05-11 while net outstanding sanctions as of
2Q12 were at`1,791bn, which would be typically utilised over next 3-4 years.
Given the size of outstanding sanctions at almost 1.6x the loan book, we
believe growth outlook for POWF is robust over the medium term.
Exhibit 30. POWF: Trend in sanctions and disbursements (`b
186225
311
695
570
655
752
0
180
360
540
720
900
FY05 FY06 FY07 FY08 FY09 FY10 FY11
-20%
10%
40%
70%
100%
130%Sanctions (` bn) YoY Growth (%)
94117
141162
211
258
341
0
80
160
240
320
400
FY05 FY06 FY07 FY08 FY09 FY10 FY11
0
8
16
24
32
40Disbursements(` bn) YoY Growth (%)
Source: Company, JM Financial.
Loan book to register 21% CAGR over FY11-14E
POWF has delivered robust loan book CAGR of 23% over FY05-11. As of 2Q12,
it had sanctions of`1.8trn and has already commenced disbursements for
projects having outstanding sanctions of`810bn (47% of total sanctions). This
is likely to support near-term loan book growth. Additionally, POWF has
executed agreements for`253bn (15% of the sanctions) though disbursements
are yet to begin. All these factors do give us confidence on the growth outlook
for POWF over the next three years. We have modeled in 18%/17%/17%
disbursement growth in FY12/FY13/FY14E respectively leading to c.21% loan
CAGR over FY11-14E.
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Exhibit 31. POWF: Trend in loan book and disbursements (`b
356439
516 644
799
996
1,215
1,470
1,764
0
400
800
1,200
1,600
2,000
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
15%
17%
20%
22%
25%
27%Loan Book (` bn) YoY Growth (%)
117 141162 211
258
341
403
471
551
0
130
260
390
520
650
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
10
15
20
25
30
35Disbursements(` bn) YoY Growth (%)
Source: Company, JM Financial.
Generation will continue to dominate the loan mix
POWF has historically focused on financing of generation projects, share of
which has continuously increased over last few years (constituted 84% of loan
book in 2Q12 vs 60% in FY03). Over the years, POWF has diversified itsportfolio through participation in large power sector projects such as R-APDRP,
independent transmission projects, non-conventional energy sources,
distribution reforms (DRUM), consortium lending etc. However, considering
sanctions and disbursements in the last 15-18 quarters (Exhibit 6), we believe
generation will continue to dominate the loan mix for POWF.
POWF has limited exposure to state distribution and transmission companies
(at 13% as of 2QFY12) while exposure to private players forms 9% of the loan
book. Generation companies (which form c.14% of POWFs book) are much
better financially positioned than distribution and transmission companies.
Exhibit 32. POWF: Loan mix discipline (LHS) and borrower wise as of 2Q12
Generation
83%
Transmission
8%
Others
4%Distribution
5%
State Sector
64%
Central Sector
19%
Joint Sector
8%
Private Sector
9%
Source: Company, JM Financial.
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Exhibit 33. POWF: Trends in discipline wise composition of loan book
60% 62% 67%72% 75% 77%
81% 84% 85% 85% 84%
16% 14%12% 11%
11% 12%10% 8% 8% 8% 8%
0%
20%
40%
60%
80%
100%
120%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 1Q12 2Q12
Generation Transmission Distribution Others
Source: Company, JM Financial.
Exhibit 34. POWF: Sanctions (LHS) and disbursements discipline (` mn) wise in last 16 quarters
0
65,000
130,000
195,000
260,000
325,000
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
Generation Transmission Distribution Others
0
26,000
52,000
78,000
104,000
130,000
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2 Q 1 2
Generation Transmission Distribution Others
Source: Company, JM Financial.
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Private sector share to increase going ahead
Government sector has accounted for majority of the loan book with state
electricity boards and state utilities (e.g. NTPC, NHPC) being major customers.
However, various government initiatives and guidelines (such as Electricity Act,
2003, unbundling of SEBs) have encouraged private sector to enter generation
and transmission businesses. Of 87GW capacity addition, private sector will
account for c.57%. Naturally, we expect private sector share to increase from
current level of c.9%.
Exhibit 35. POWF: Trend in sanctions borrower wise (`bn) (LHS) and in % terms
527297 327
423
115
181
52
79 158 167
62137
695
570
655
752
25
2285
0
180
360
540
720
900
FY08 FY09 FY10 FY11
State Sector Central Sector Joint Sector Private Sector R-APDRP
76%
52% 50% 56%
17%
32%
8% 14%
24%22%
10%18%
33%
2%
13%
0%
20%
40%
60%
80%
100%
FY08 FY09 FY10 FY11
State Sector Central Sector Joint Sector Private Sector R-APDR
Source: Company, JM Financial.
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Exhibit 36. POWF: Outstanding sanctions as on 30, Sept11Outstanding Sanctions as on September 30, 2011
Doc. executed & disb.commenced
Doc. executed but disb.not commenced
Doc. not executed Total O/s Sanction
Discipline-wise (Rs mn)
Generation 501,330 273,980 549,100 1,324,41
Transmission 109,650 49,090 28,260 187,0
Distribution 49,770 3180 2850 55,8
R-APDRP (Part A) 41,460 620 1800 43,88
R-APDRP (Part B) 71,260 0 94,610 165,87
Others* 6920 2900 4270 14,0
Total 780,390 329,770 680,890 1,791,0
Discipline-wise (%)
Generation 28.0% 15.3% 30.7% 73.9
Transmission 6.1% 2.7% 1.6% 10.4
Distribution 2.8% 0.2% 0.2% 3.
R-APDRP (Part A) 2.3% 0.0% 0.1% 2.4
R-APDRP (Part B) 4.0% 0.0% 5.3% 9.3
Others* 0.4% 0.2% 0.2% 0.8
Total 43.6% 18.4% 38.0% 100.0
Borrower-wise (Rs mn)
State Sector 533,240 214,350 494,820 1,242,4
Central Sector 73,630 20 26,790 100,44
Joint Sector 13,700 59,000 0
Private sector 159,810 56,390 159,280 375,48
Total 780,380 329,760 680,890 1,791,03
Borrower-wise (%)
State Sector 29.8% 12.0% 27.6% 69.4
Central Sector 4.1% 0.0% 1.5% 5.6
Joint Sector 0.8% 3.3% 0.0%4.1
Private sector 8.9% 3.1% 8.9% 21.0
Total 43.6% 18.4% 38.0% 100.0
Source: Company, JM Financial.
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Troubled states account for 31% of loan book
POWFs exposure to troubled states (Tamil Nadu, Uttar Pradesh, Rajasthan,
Madhya Pradesh and Jammu & Kashmir which account for c.80% of total SEB
cash losses) is 31% of the loan book.
Exhibit 37. POWF: Segment wise composition of loan book as of 2Q1
Troubled States % Loan Exposure
Rajasthan 8.8%
Uttar Pradesh 8.1%
Madhya Pradesh 7.4%
Tamil Nadu 5.6%
Jammu & Kashmir 1.3%
Total 31.1%
Other Sates % Loan Exposure
Maharashtra 12.8%
Haryana 8.6%
Andhra Pradesh 8.5%
West Bengal 8.0%
Delhi 6.9%
Uttarakhand 4.4%
Gujarat 4.1%
Chattisgarh 4.1%
Jharkhand
Himachal Pradesh 2.9%
Karnataka 2.4%
Others 3.2%
Total 68.9%
Source: Company, JM Financial.
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ECBs and infra bonds to make borrowings profilemore diverisified
ECBs to bring down reliance on domestic borrowings
POWF funds its assets through market borrowings of various maturities and
subordinated debt. Domestic bonds continue to constitute bulk of the
borrowings (c.76% in 2Q12) while bank loans formed c.22% in 2Q12.
Proportion of bonds in total borrowings has increased to 65% in FY11 from
33% in FY05.
However, post IFC status, POWF has been using ECB option aggressively and
currently (as of 2Q12) has c.`56bn (6.1% of total borrowings) of ECBs. It had
approached RBI for in-principle approval of $1bn to set up a Medium Term
Notes programme for raising ECBs.
It also intends to raise money through infrastructure bonds (aims to raise
`69bn in FY12, has already filed draft prospectus) and tax free bonds (to raise
`50bn in FY12). However, we note that in FY11, POWF managed to garner only
`2.35bn of infra bonds. Hence, we expect ECBs and tax free bonds to
dominate incremental borrowings for the company, leading to more diversified
borrowings profile.
Exhibit 38. POWF: Trend in borrowings composition (` bn) and duration of assets and liabilities
228
281348
417
531
678
861
65%68%
67%56%
47%40%33%
24%
24%
25%
36%43%47%
47%
0
200
400
600
800
1,000
FY05 FY06 FY07 FY08 FY09 FY10 FY11
Bonds ECB Term Loans CP WCDL / OD Infra Bonds Interest Subsidy
5.645.97
6.35 6.32
4.15
4.785.18
5.46
2.00
3.20
4.40
5.60
6.80
8.00
FY09 FY10 FY11 1Q12
Loans (in yrs.) Borrowings (in yrs.)
Source: Company, JM Financial. WCDL = Working Capital Demand Loan, Duration is weighted average
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Unhedged foreign borrowings could add volatility to earnings
As of Sept11, POWF has foreign currency borrowings of c.`56 bn (6.1% of total
borrowings) of which 48% were US$ denominated, 49% were JPY and balance
were in euros. Only c.14% of POWFs foreign borrowings have been hedged,
leaving it exposed to currency movement. POWF booked MTM loss of`5.3bn
during 2QFY12. However, losses are notional and since these borrowings are
long term in nature (due FY15 onwards), MTM losses could reverse with
strengthening of the rupee going ahead.
Exhibit 39. POWF: Trends in PBT before and after forex MTM (LHS) and forex MTM
0.0
8.0
16.0
24.0
32.0
40.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11
PBT before Forex MTM (`bn) PBT after Forex MTM (`bn)
92286
874
(389)
1,4621,26
(2,664)-3,000
-2,000
-1,000
0
1,000
2,000
FY05 FY06 FY07 FY08 FY09 FY10 FY1
Forex (` mn) Gain / (Loss)
Source: Company, JM Financial.
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Equity issuance in FY12 to lead to stable margins
Spreads to decline by 14bps in FY12E due to higher borrowing costs
We expect 14bps decline in spreads for POWF in FY12E and stable spreads
over FY11-14E driven by a) increase in borrowing cost of 65bps over FY11-14E.
POWF intends to borrow c.`300bn in FY12E from a mix of instruments (infra
bonds, tax free bonds, ECBs and other domestic borrowings). This will help in
keeping the blended cost of funds under check, limiting downside to spreads.b) it has a negative repricing schedule of`30bn i.e. excess of loan liabilities
(`230bn up for re-pricing) over loan assets (`200bn). On ALM front, mismatch
is even wider with`67bn of negative re-pricing in FY12E and `26bn in FY13E.
Thus we expect POWFs spreads to decline by 14bps to 2.1% in FY12E and
improve to 2.27% over FY12E-FY14E driven by lower borrowing costs. We
expect margins to remain stable over FY11-14E, leading to NII CAGR of 23%
over FY11-14E.
Exhibit 40. POWF: Maturity pattern of loans assets and liabilities (` bn)
86 79 87 87 90
567
153105 90
52110
346
0
150
300
450
600
750
2012 2013 2014 2015 2016 Beyond fiscal
2016
Loan Assets Liabilities
Source: Company, JM Financial. * As of March 31, 2011.
Exhibit 41. POWF: Trend in NII growth and margins
12.3 14.418.0
22.9
28.633.3
41.6
52.0
62.3
0.0
15.0
30.0
45.0
60.0
75.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
-16%
0%
16%
32%NII (` bn) YoY Growth(%)
3.6% 3.7%3.9% 3.9%
3.7% 3.8%
2.1% 2.0% 2.0%2.2%
2.5%2.3% 2.1% 2.2% 2.3
3.7% 3.6% 3.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY1
NIM (%) Spread (%)
Source: Company, JM Financial.
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Asset quality: Factoring credit cost of 14bps
So far asset quality trends remain strong
Over the last 5 years (FY06-11) POWF has enjoyed benign asset quality and
virtually zero credit costs. Asset quality remained impressive with gross NPLs
of 0.23% in FY11 and 0.02% in FY10 (FY07: 0.10%). This clearly demonstrates
that POWF through its two decade of operation in power financing has
developed extensive sector knowledge and strong credit appraisal skills.
Exhibit 42. POWF: Trends in asset quality from FY05-FY11
0.7%
0.3%
0.1%
0.0% 0.0% 0.0%
0.2%
0.0%
0.2%
0.3%
0.5%
0.6%
0.8%
FY05 FY06 FY07 FY08 FY09 FY10 FY11
Gross NPLs (%) Net NPLs (%)
Source: Company, JM Financial. * As of March 31, 2011.
Higher exposure to generation companies which are financially better
positioned than distribution companies is a comforting factor
POWF has 84% of lending to the generation sector which is performing much
better financially than the state-owned distribution sector (POWFs exposure is
13%). However, POWF does face risks from poor financial health of state-owneddiscoms indirectly as it leads to delay in payments for generation companies;
consequently, we factor 13/14bps of credit costs for FY13E/14E. Further,
POWF maintains reserve for bad debts (c.1% of O/S loan book) which should
act as a buffer in case of any restructuring/NPLs.
Exhibit 43. POWF: Financials of discoms vs gencosProfit / (loss) of SEBs as of FY10*State
Discoms (` bn) Gencos (` bn) PFC Exposure (%)Tamil Nadu (88.6) 0.0 5.6%
Rajastan (105.3) (1.8) 8.8%
Uttar Pradesh (48.0) (16.8) 8.1%
Madhya Pradesh (30.4) (1.0) 7.4%
Jammu & Kashmir (20.2) 6.8 1.3%
Total for all states -348.08 59.78
Source: Company, JM Financial. * Cash Profit - Subsidy Received Basis
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Escrow mechanism with state utilities and state guarantees provides
asset quality comfort
POWF also has an escrow account mechanism in place with the utilities, which
acts a credit enhancement mechanism. Under this, revenue of SEBs flows into
the escrow account and is available to the SEBs. In case of any default, POWF
would have the first right to claim the money on demand. This mechanism
would ensure timely payment of all the dues to the company.
As of 31 Mar11, 81% of its outstanding loans to State and Central sector
borrowers involved such escrow account mechanism. However, we note that,
in the event that end users do not make payments to their SEBs, the escrow
account mechanism and the trust and retention account arrangements will not
be effective.
In the past, POWF has invoked escrow mechanism twice (1997 Andhra
Pradesh and 2001 Madhya Pradesh) and both times it worked successfully.
Smaller private sector power projects may face problems due to
unavailability of fuel (coal)
According to POWF, as of now, it does not expect any significant risk to private
players due to coal linkage problems. According to POWF, Coal India wasproviding private players c.60% of the total coal requirement; though, as per
revised agreement, it is now providing only 50% of the requirement. POWF
expects the shortfall of 10% to get easily fulfilled through coal import. As a
precaution, since 11 April, POWF is not sanctioning/disbursing loans to
projects which are without Fuel Supply Agreement (FSA) and Power Purchase
Agreement (PPA).
According to POWF, it has also done an indepth stresstest analysis on all
power projects it has lent till now. The analysis reveals that c.700MW of power
projects (less than 0.5% of loan book) are currently under stress. The company
has not witnessed any defaults from SEBs and even loss making SEBs (Tamil
Nadu, Rajasthan, Uttar Pradesh) are making payments on time.
Having said that, we do expect small private sector power projects (50-100MW)
to face problems due unavailability of coal as these projects have very limited
financial ability to sustain business losses.
Modeling credit cost of 14bps and reserves for bad and doubtful debts
(currently 1% of loans) should also act as a buffer
Over the last 5 years (FY06-11) POWF enjoyed benign asset quality and
virtually zero credit costs. Asset quality remained impressive with gross NPLs
of 0.23% in FY11 and 0.02% in FY10 (FY07: 0.10%).
However going forward, we expect some hiccups in asset quality especially
from private generation sector. We assume zero default probability of SEBs but
higher slippages from private sector exposure.
While risks exist, we believe it has taken steps to ensure timely repayment,
including conservative assumptions on project profitability, adequate fuel
linkage and on cash flows and assets.
We have built higher slippages over next 2 years mainly emanating from
private sector, and consequently higher credit costs. We conservatively factor
credit costs of 13/14bps over FY13E/14E. Further, POWF maintains reserve for
bad and doubtful debts (currently 1% of O/S loan book) which should act as a
buffer in case of any restructuring/NPLs.
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Exhibit 44. POWF: Reserve for bad and doubtful debts and as % of O/s loans
4.85.5
6.47.2
8.59.8
11.2
13.2
15.61.3% 1.2%
1.1%
1.4%
1.1%
1.0% 0.9%0.9% 0.9%
0.0
4.0
8.0
12.0
16.0
20.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
0.7%
0.9%
1.0%
1.2%
1.3%
1.5%Reserve for Bad and Doubtful Debts (` bn) % of O/s Loans
Source: Company, JM Financial.
We expect gross NPLs of c.0.5% and net NPLs of 0.4% by FY14E and higher
credit costs of 14bps in FY14E from 4bps in FY11.
Exhibit 45. POWF: Trend in asset quality
0.3%
0.1%
0.0% 0.0% 0.0%
0.2%0.3%
0.4%
0.5%
0.0%
0.1%
0.2%
0.4%
0.5%
0.6%
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
0%
15%
30%
45%
60%
75%
Gross NPLs (%) Net NPLs (%) Coverage (RHS) (%)
(1) (0)
4
8
13
(1) (2)
1
14
(5)
0
5
10
15
20
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY1
LLP (bps)
Source: Company, JM Financial.
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Power Finance Corporation 9 December 201
JM Financial Institutional Securities Private Limited
Sufficiently capitalised post FPO
Sufficiently capitalised with CAR of 16.6% by FY13E
In May 2011, POWF came up with a Follow on Public Offer (FPO) where it raised
c.`47bn. Post FPO, CAR for the company improved to 18.2% in 2Q12 vs 15.7%
in 4Q11. POWF is sufficiently capitalised for growth over the next 3 years.
However, we note that as a government company POWF enjoys several benefitssuch as exemption from prudential exposure norms in respect of lending to
Central and State government entities in the power sector until 31 Mar12.
POWF is required to submit a roadmap to RBI for achieving adherence to the
prudential regulations prescribed by RBI, including further capitalisation. If
such exemptions are removed, capital requirement of POWF may increase
significantly.
Exhibit 46. POWF: Trend in tier I capital and leverage
17.2%
16.1%
17.1%
14.7%
15.6%14.9%
16.7%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
FY08 FY09 FY10 FY11 FY12E FY13E FY14E
4.0
4.7
5.4
6.1
6.8
7.5
Tier I (%) Leverage
Source: Company, JM Financial.
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Power Finance Corporation 9 December 201
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Return ratios to remain healthy
Solid 20% net profit CAGR over FY11-14E with ROE of c.18%
We expect earnings CAGR of 20% over FY11-14E driven by 23% CAGR in NII on
the back of robust 21% loan book CAGR; however, we have modeled elevated
credit costs (14bps in FY14E vs 4bps in FY11). Return ratios should remain
healthy with ROA of 2.6% and ROE of 18% in FY14E. However, unhedged
foreign borrowings could add volatility to earnings.
Exhibit 47. POWF: Trends in PBT before and after forex MTM (LHS) and Forex MTM
0.0
8.0
16.0
24.0
32.0
40.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11
PBT before Forex MTM (`bn) PBT after Forex MTM (`bn)
92286
874
-389
1,4621,26
-2,664-3,000
-2,000
-1,000
0
1,000
2,000
FY05 FY06 FY07 FY08 FY09 FY10 FY1
Forex (` mn) Gain / (Loss)
Source: Company, JM Financial.
Exhibit 48. POWF: Trends in return ratios
9.7 9.912.1
19.723.6
26.2 26.0
37.4
44.7
0.0
10.0
20.0
30.0
40.0
50.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
-28%
0%
28%
56%
84%Net Profit (`bn) YoY Growth (%)
5.0%
8.0%
11.0%
14.0%
17.0%
20.0%
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13EFY14E
2.
2.
2.
2.
3.
3.
ROE (%) (LHS) ROA (%)
Source: Company, JM Financial.
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Power Finance Corporation 9 December 201
JM Financial Institutional Securities Private Limited
Negatives priced in; initiate with BUY and `205 TP Significant underperformance to BSE Bankex; CMP offers attractive entry
point
POWF has been a significant underperformer over the last 12 months which
can be attributed to: a) concerns over project execution and coal availability
for power projects, b) concerns over asset quality in the light of mounting
losses at the SEBs, and c) sharp increase in wholesale fund rates resulting inmargin and spread compression.
Over the last 1year, POWF has corrected by c.44% and underperformed BSE
Bankex by 21%: POWF has witnessed a significant de-rating from peak multiple
of 2.9x 1 yr fwd book to 0.95x currently. We believe current valuations are
attractive at 0.9x FY13E book with dividend yield of c.5% (based on FY13E
dividend).
Exhibit 49. POWF: Stock performance visavis BSE Bankex
20
40
60
80
100
120
Dec-10 Feb-11 Apr-11 Jul-11 Sep-11 Nov-11
POWF - 1 Year Price Performance (%)
20
40
60
80
100
120
Dec-10 Feb-11 A