Power Finance Corporation Ltd

Date Published: February 16, 2021

Inspired by Nature, Aspiring for a Green Future

Company Overview:

Incorporated on July 16th, 1986, Power Finance Corporation Ltd. is a Schedule-A Navratna CPSE, and is a leading Non-Banking Financial Corporation in the Country. PFC’s registered office is located at New Delhi and regional offices are located at Mumbai and Chennai. PFC is under the administrative control of the Ministry of Power. PFC was conferred the title of a ‘Navratna CPSE’ in June,2007, and was classified as an Infrastructure Finance Company by the RBI on 28th July,2010. PFC plays a crucial role in the rise of India as a global player. Increasingly, a country’s development is gauged by measuring its energy usage. With a large fraction of our nation still, unfortunately, without any access to electricity, PFC will become an increasingly important factor in the years to come. PFC has ability to deliver unbeatable results. Despite the hardships played by the power and financial sectors, PFC continues to maintain a healthy loan book, as well as low levels of NPAs. This is thanks to PFC’s robust evaluation and appraisal processes.

Industry Overview:

India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other smaller financial entities. The banking regulator has allowed new entities such as payments banks to be created recently thereby adding to the types of entities operating in the sector. However, the financial sector in India is predominantly a banking sector with commercial banks accounting for more than 64 per cent of the total assets held by the financial system.The Government of India has introduced several reforms to liberalise, regulate and enhance this industry. The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). These measures include launching Credit Guarantee Fund Scheme for Micro and Small Enterprises, issuing guideline to banks regarding collateral requirements and setting up a Micro Units Development and Refinance Agency (MUDRA). With a combined push by both government and private sector, India is undoubtdly one of the world’s most vibrant capital markets. In 2017, a new portal named ‘UdyamiMitra’ has been launched by the Small Industries Development Bank of India (SIDBI) with the aim of improving credit availability to Micro, Small and Medium Enterprises’ (MSMEs) in the country. India has scored a perfect 10 in protecting shareholders’ rights on the back of reforms implemented by Securities and Exchange Board of India (SEBI).

Company Operations:

Since its inception, PFC has been providing financial assistance to power projects across India including generation, transmission, distribution and RM&U projects. Recently, it has forayed into financing of other infrastructure projects which have backward linkages to the power sector like coal mine development, fuel transportation, oil & gas pipelines etc. The borrower profile includes State Electricity Boards, State sector power utilities, Central sector power utilities and Private sector companies. PFC is also the nodal agency for the implementation of the ambitious Ultra Mega Power Plants (UMPPs) and the R-APDRP programme of Govt. of India. The company also has the mechanism of rating different state Power Utilities on its performance.PFC presently has ten subsidiary companies. PFC Consulting Ltd. (PFCCL) is a wholly owned subsidiary handling fee based services. The six other companies namely Orissa Integrated Power Limited, Coastal Karnataka Power Limited, Coastal Tamil Nadu Power Limited, Coastal Maharashtra Power Limited, Jharkhand Integrated Power Limited and Akaltara Power Limited, are SPVs (Shell Companies) created for implementing the flagship Ultra Mega Power Projects. After purchase of the entire holding of Govt of India in Rural Electrification Corporation Limited(REC) in FY 2018-19, REC has now become a subsidiary of PFC.PFC is also one of the promoters in Energy Efficiency Services Limited (EESL), with NTPC, Powergrid and REC being the other promoters. EESL is currently implementing of world’s largest energy efficiency portfolio and has been instrumental in energy savings of more than 50 billion kWh/year and estimated GHG reduction of more than 40 million tonne CO2/year.

Key Strengths:

Largest NBFC by Net worth (all reserves), A specialized Financial Institution in Power Sector, A dominant player with around 20% market share, A lean and professionally-managed organization, Designated as a “Nodal Agency” for development of Integrated Power Development Scheme(IPDS), Ultra Mega Power Projects (UMPPs) and “Bid Process Coordinator” for Independent Transmission Projects (ITPs) , ISO 9001:2015 certified , A consistently profit-making and dividend-paying company, Strong asset quality reflected in low NPAs, Lowest Administrative cost in the industry, consultancy & Advisory services in strategic, financial, regulatory and capacity building skills under one umbrella. During the financial year 2019-20 company has sanctioned more than 1lac crores of loans and disbursed 68000 crores of loan which is 12% more than previous year.

Government Initiatives:

Various steps have been taken by Government of India to tackle the issue of stressed assets in Power Sector. Scheme for Harnessing and Allocating Koyala Transparently in India (SHAKTI) was launched to provide coal to the stressed power projects. SHAKTI covers projects which have PPAs but do not have Fuel Supply Agreements in place and also those which do not have Power Purchase Agreements (PPAs). The objective of this scheme is to eliminate the stress in generation utilities. Some of these stressed projects have already started to receive coal under the scheme. Also, a Pilot Scheme for mid-term PPA for stressed projects was launched by the Ministry of Power for which PFCCL, company’s subsidiary company is the Nodal Agency and PTC is the aggregator to purchase power for three years from commissioned projects with no PPA. Under the scheme, beneficiary states have signed PPAs for 1900 MW with eligible bidders at a tariff of Rs, 4.24 per unit. Now Phase II of the Pilot PPA scheme has been launched with PFCCL as the Nodal Agency and NHPC as the aggregator. Bids from 15 companies have been finalized with a tariff of Rs, 4.41 per unit. Ministry of Power has also issued significantly important guidelines with respect to timelines for approving the petitions for tariff increase due to change in law and also the directions mandating the power distribution licensees to open and maintain adequate Letter of Credit as a payment security mechanism under Power Purchase Agreements. These initiatives will help the projects to sell power on sustainable basis and resolve the stress going forward. Under these schemes some of the projects financed by PFC have received coal linkages and also mid-term PPAs, which will help in resolution of stress. In order to encourage Renewable Generation, Ministry of Power extended the waiver of ISTS Transmission charges and losses for Solar & Wind based Projects up to March 2022. Further, in order to achieve the Renewable target of 175000 MW of Renewable Capacity by 2022, MOP issued Long Term Growth trajectory Renewable Purchase Obligation (RPO) for Solar as well as Non-Solar till the year 2022.

Our View:

PFC is India’s largest lender to the power sector with its consolidated loan asset book reaching Rs. 640,387crore (US$91.4bn) at the end of December 2019. Of the total loan assets, 54% of exposure is into thermal power projects, which amounts to Rs343746 crore (US$49.1bn). Apart from being India’s largest coal-fired power funder, PFC has started to expand its lending operation to renewable energy projects.PFC’s lending exposure to renewables has increased in the last three years with its gross loan assets in renewables reaching Rs33759crore (US$4.8bn) at the end of December 2019. As of December 2019, PFC’s loan asset exposure to transmission and distribution sector is of Rs259113 crore (US$37bn), forming 40% of its gross loan assets.PFC has lent Rs 33,759 crore (US$4.8bn) to renewable energy projects as of December 2019, with some 5% of loans outstanding. Given India’s massive renewables target of 450GW by 2029/30, and the associated funding requirements for the expansion and modernization of the national grid system, IEEFA estimates US$500-700bn of new investment is needed. This will also require work from smaller regional developers that provides a significant opportunity for a rapid step-up in funding from PFC.

As per the mean estimates of earnings projections made by brokers at Bloomberg, the estimated EPS for FY2021 and FY2022 stands at Rs.28.88 and Rs.32.01 respectively as compared to EPS of Rs.21.42 for FY 2020. The stock is trading at a PE of 4.29. Therefore, taking into consideration this recommendation of Power Finance Corporation Ltd is being given for 1 year time horizon.

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