Power Finance Corporation announces Q3FY19 results

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Profit jumped by 53% from INR 1,355 crs to INR 2076 crs

Key Financial Highlights:

  • Profit saw a significant jump when compared with the:
  • For corresponding 9 months – profit is up by 71% to INR 4,804 crs from INR 3,565 crs
  • This was achieved by overcoming the challenges being witnessed by power sector.
  • Continuous efforts of the past 1 year have now started reflecting in PFC’s results.
  • Performance with respect to Key Financial Indicators
  • During its earlier interactions with the media, PFC had shared that it is focussed on improving its financial indicators.
  • PFC’s key financial indicators have been consistently improving quarter-on -quarter showing that it is back on track and fully geared up for the next growth cycle of PFC.
  • To name a few:
  • Current yield is at 10.65% as compared to 10.57% in quarter 1 current FY
  • In spite of an increasing interest rate scenario, cost of funds reduced by around 30 basis points on year-on-year basis.
  • Actively working on diversifying borrowing avenues. If last two years is anything to go by, earlier PFC’s foreign currency borrowing portfolio was only 4% and it is 12% now.
  • Successfully established itself in the Asian markets and recently PFC had tapped the US funds market, where it had received a very positive response.
  • Also, in July last year, PFC received approval to raise 54EC Capital Exemption Bonds, which serves as very cost-effective source of fund to PFC. Since then, the Company had raised Rs. 500 crore from these bonds and its focus is to continue to maximise the 54EC fund portfolio.
  • Efforts on to achieve cost competitiveness in future also.
  • With the improvements in yield and reduction in cost, PFC’s interest spread has been increasing quarter-on-quarter. To compare with our current spread of 2.68% from the initial quarter, we had improved by 19 bps. Going forward, PFC hopes to maintain the spread in the same range.
  • PFC’s Return on Equity is among the top quartile level of the industry. This quarter, PFC’s ROE increased by around 8% to 20.97% from last December quarter and by around 7% from the second quarter of FY19.
  • Further, the Return on Average Assets has also multiplied by 1.5 times to 2.77% from previous periods.
  • PFC wants to strongly rebut the media reports that it is not releasing disbursements. In this regard, the Company likes to share that:
  • PFC has disbursed around INR 14,600 crore in the December Quarter, which is 34% increase from last December Quarter.
  • 9 months disbursement is also more than INR 45,000 crore against roughly INR 37,000 crs last years.
  • Further PFC’s loan assets grew by 14%.
  • On the Capital Adequacy front, sustained efforts to boost capital adequacy continue. If we look at our CRAR trend during the year, the CRAR was 17.71% in the initial quarter, then it increased to 17.91% in the September Quarter and currently it is at 19%. Thus, CRAR has improved by about 1.3% during the past nine months which is a noteworthy accomplishment for PFC.
  • Asset Quality
  • On the asset quality side, PFC has not added any ‘Non-Performing Assets’ during the December Quarter and continue to have no NPAs in Government Sector.

An update on progress made so far on resolution of Stressed Assets:

  • PFC had earlier shared that it is close to achieving resolution for GVK Ratle Project of INR 811 cr. The Company is pleased to inform that the borrower has been servicing regularly for the past 11 months. So, this loan asset is expected to be upgraded to ‘Standard Asset’ from non-performing category in the coming quarter along with provision reversal of INR 600 cr. approx.
  • Further, 100% principal recovery i.e. of around INR 1,400 cr. has been offered by three borrowers namely Dans Energy, Shiga Energy and Essar Transmission. We are negotiating a better deal with them. Currently 16% provisioning is available for these project, and if settled, it will lead to reversal of this provision too.
  • For Essar Mahan, the promoter has already given his resolution offer. Now lenders have received another offer which is significantly higher than the promoter’s offer. The offers are under evaluation and lenders expect further improvement on the offer. Looking into the offers received, we feel that the provision of 53% already made for this project is sufficient.
  • For RKM Powergen (1440 MW), where we have an exposure of INR 5,155 Cr, there have been positive developments on PPA with Chhattisgarh State and also PPA under Pilot scheme. With this, project is likely to have tied up PPA for ~90% capacity. This will significantly improve the project valuation.
  • Further, the Government has been actively taking initiatives to resolve various bottlenecks related to power purchase and fuel supply. These initiatives will help in fetching better valuations for the projects.
  • Under 2500 MW pilot scheme, two of our stressed projects namely., RKM Powergen & Jhabua Power were successful in obtaining PPAs;
  • Now, Govt. has decided to launch phase II of the pilot PPA scheme, which is further expected to reduce the stress in the projects.
  • As reflected above, with the concerted efforts of all stakeholders, resolution process has started picking up pace.
  • Also there have been many positive developments on both operational and financial fronts and these developments will surely improve the project valuations going forward.

Also, PFC made a sufficient provisioning of 52% against the stressed assets, which the Company believes is adequate to protect its future profits.

We believe that now the worst is behind us and with our sustained efforts, we would continue to deliver such performance in future also.

  • PFC – REC acquisition deal
  • As you are all aware, on 6th Dec 2018, Govt. of India had given ‘In Principle’ approval for strategic sale of its shareholding in REC Ltd. to PFC along with transfer of management control.
  • Govt. of India on several occasions earlier had emphasised on consolidation of CPSEs through mergers and acquisitions:
  • with a view to achieve better synergies,
  • economies of scale,
  • ability to take higher investment decisions and
  • to create more value to shareholders of CPSEs.
  • This was also brought out by the Hon’ble Finance Minister in his budget speech for the FY 2017-2018.
  • We feel this deal is a step forward by the Govt. of India towards its goal (announced in the last year budget) of consolidating & merging multiple PSUs operating in the same space.
  • PFC views the acquisition as an inorganic growth opportunity which will provide a competitive edge to PFC in the future.

PFC- REC deal will create fair amount of synergy as:

  • It will create a common platform for power sector financing.
  • PFC will benefit through wide spread geographical reach of REC.
  • PFC will be able to leverage the expertise of REC in distribution and transmission space and maximise its growth and on the other hand REC will be able to leverage the expertise of PFC in the generation space.
  • A synchronised approach for resolution of stressed assets can be followed.
  • Our stakeholders have a lot of questions concerning the deal, so PFC would like to give some key updates on the deal:
  1. Firstly, PFC would like to share that it has received all regulatory approvals required for the deal i.e. from SEBI, Competition Commission of India and RBI.
  2. On the pricing front, there are lot of speculative numbers floating in the market, but PFC would like to state that the transaction price has not been finalized yet & price determination is under way.
  3. DIPAM has already appointed a valuer for valuation of REC ltd. Further, PFC is also independently getting the valuations of REC done. Based on the valuations arrived, the pricing will be mutually decided by GoI & PFC. I wanted to clarify that the pricing for the transaction shall be as per the extant SEBI guidelines.
  4. Also, PFC is not considering extending open offer to the minority stakeholders.
  5. PFC envisages to close the deal by 31st March 2019
  6. Regarding the funding part, PFC is planning to fund it through debt from the market and/or payments received on loan assets from borrowers including interest.
  7. With regard to the funds required through debt from the market, PFC is already in discussion with lenders and it sees no issues whatsoever on this front, going forward.
  8. Now coming to the credit rating of PFC, after the announcement of the deal, CRISIL and ICRA have continued to maintain the existing ‘AAA’ rating of PFC.
  9. Further, PFC is in continuous dialogue with the Credit Rating Agencies to keep them abreast of the deal and to provide them comfort on the capital adequacy levels and the status of government support for both PFC & REC.
  10. Post-acquisition, PFC envisages an impact on its capital ratio, as PFC will have to reduce its investment in REC which is exceeding 10% of owned Fund from the Tier I Capital as required under RBI guidelines.
  11. However, PFC is continuously initiating appropriate actions to ensure that its Capital Ratio adhere to the regulatory thresholds post the deal.
  12. PFC is in the process of tying up subordinate debt for enhancing tier II capital.
  13. PFC is confident that it will not only meet the 15% minimum capital adequacy required by RBI but also has sufficient capital to sustain its future growth.

Thus, the Company hopes that as envisioned by the Hon’ble Finance Minister Shri Arun Jaitely, PFC-REC acquisition deal will help to achieve integration across the Power Chain, obtain better synergies, create economies of scale and have enhanced capability to support energy access and energy efficiency by improved capability to finance power sector.

Some thoughts on the future outlook for PFC:

· With the continuing focus of GoI in the renewable space, this sector is bound to play a major role in the years ahead as the country looks to meet its energy needs. PFC is all-set to take advantage of this. PFC is increasing its footprint in the solar and wind space by leaps and bounds.
· Moreover, with Government focus on strengthening of transmission & distribution system and development of e-mobility ecosystem, the power demand is expected to be on an upward trend. The Company feels this will provide an immense growth opportunity for PFC.

Therefore, with a positive demand outlook, PFC is quite optimistic about the future funding potential in the sector.

To conclude, the Company believes that its current performance delivers to the promises made in the past and it will continue to focus on its top line and continue to deliver such growth in future also.

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