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Power Finance Corporation – Review and Recommendation

February 2, 2007

Power is the most essential element to run any industry. The situation of Power is pathetic in India. Their is acute shortage of power and with Central Government’s aim to provide Power for all by 2012, their is a lot of investment needed on this front.

Background:
Power Finance Corporation [PFC] is a PSU undertaking promoted by Govt of India to finance mega power projects. PFC offers a range of financial products and fee-based advisory services to infrastructure projects in the power sector. PFC intends to diversify its borrowers profile by including companies from different sectors such as – coal, lignite, oil and gas, wind power and non-conventional energy.

PFC – Silver Lining:
PFC has less than 1 percent non-performing loans. Most of its borrowers are PSUs NTPC, NHPC and state boards. All of its loans are secured by various guarantees and the company has been profitable for the past 5 years. PFC is highly under leveraged with a long term debt-equity of 4-5 times as against an industry average of 10 times which leaves with lot of headroom for improving return on equity.

PFC – Risks:
Top 10 borrowers account for more than 50% of PFCs business. Net interest margins are under pressure and have been declining, from 4.5% [2006] to 3.4% [2007]. Since all of its lending is restricted to power & energy sector, poses some risk.

Power Finance Corp – The IPO:
Fully Diluted Equity – 114.79 crore equity shares of Rs 10 each.
Share available for Retailers: 40,185,845 = Rs 341 Crore
Price Range – Rs73 to Rs 85

PFC Financials:
PFC reported a PAT of Rs 401 crore for the first half of FY2006-07. Annualising the same, PFC would report a PAT of Rs 800 crore a decline by Rs175 crore over its previous year. However on fully diluted Equity, PFC is expected to report an EPS of Rs 7.0 for FY2006-07 and growth in EPS is uncertain until more details about the company are made available. At EPS of 7, the IPO is priced at P/E of 10.4 and 12 for Fy2006-07.

Recommendation:
I would be comfortable if the IPO is priced at Rs 73 leaving something for short-term investors. It may list around Rs 100 but is a good long term bet when global financial institutions come fishing for financial companies with good loan portfolio.

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