PFC Equity Reportfor Upload-10th July 2012

8/12/2019 PFC Equity Reportfor Upload-10th July 2012

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Fundamental and Valuation GradesICRA Online has assigned the Fundamental Grade 4 and the Valuation Grade A to PowerFinance Corporation (PFC). The Fundamental Grade 4 assigned to PFC implies that the

company has Strong Fundamentals. The Valuation Grade Aassigned to PFC implies that

the company is significantly undervalued on a relative basis (as on the date of thegrading assigned).

PFC is a specialized Development Financial Institution, which was set up in 1986 with the

objective of funding projects in the domestic power sector. PFC provides loans for a range of

activities from generation to distribution, transmission, renovation and maintenance and other

related activities. PFC finances state sector entities such as State Electricity Boards (SEBs) and

State Generating Companies (SGCs) and Independent Power Producers (IPPs). In addition, PFC

has been appointed as the nodal agency to develop sixteen Ultra Mega Power Projects (UMPPs).

Generation projects constituted around 83% of PFCs loan book as on March 31, 2012

,Distribution being 4%, Transmission 8% and others 6%. PFC is registered as an NBFC IFC

(Infrastructure Finance Company) with RBI. Typically tenure of loans for generation projects is

around 15 years including 3-4 years of implementation and 6 months of moratorium.

PFC is strategically important to the Government of India (GOI) as a key agency for

implementation of its power development programme. PFC is the nodal agency forimplementation of Ultra mega Power Projects (UMPPs) and also for routing of government

grants/loans under its Restructured Accelerated Power Development and Reforms Programme(R-APDRP) scheme. Government of India held a 73.72% stake in PFC as on March 31, 2012.

Grading Positives

1) Robust energy demand outlook provides attractive growth opportunities for thecompany.

2) Augmentation of equity through FPO , large networth and liberal exposure norms for

state sector would enable PFC to take large exposures and grow the portfolio going

forward

3) Diversified funding profile with access to low cost funds like External Commercial

Borrowings, infrastructure bonds and tax free bonds

4) Operating expenses likely to remain low going forward, thereby supporting the

earning profile, though credit costs could go up from current levels

5) Experienced management and operational team, well laid out credit appraisal and

monitoring systems have helped the corporation to establish itself as a preferred

lender in the power sector

6) Remains strategically important for GoI for implementing initiatives for the progress

of power sector.

Grading Sensitivities

1) Single sector exposure leading to higher concentration risk ,exposes the company to

vulnerabilities in the power sector; concentration risk further aggravated on account

of large exposures to financially weak state power utilities, however healthy past

track record and default escrow mechanism, mitigate the risks to some extent

2) Ability to control collections from the IPP segment, which are exposed to counter

party risks and fuel availability risks

3) Competitive position vis-a-vis banks constrained due to absence of access to retail

and Current and Saving Account deposits leading to higher cost of funds and lesser

avenues to grow fee based income although return indicators are supported due to

higher yields and lower operating expenses

PFC: Key Financial Indicators

Mar-11 Mar-12 Mar-13 Mar-14

Net Interest Income 3414 4236 5752 6972Total Operating Income 3653 4376 7218 7218

PAT 2599 3032 4087 5123

ROA 2.52% 2.77% 2.63% 2.59%

EPS (Rs.) 22.64 22.97 30.96 38.81

EPS Growth (%) 11.0% 12% 35% 25%

P/E (x) 7.99 7.88 5.85 4.66

Book value per share 132 157 181 211

P/BV (x) 1.37 1.15 1.00 0.86

RoE 18.4% 16.9% 18.3% 19.8%

Source: Company Financials and ICRA Online estimates

Amounts in Rs. crore

ICRA Online Grading Matrix

Valuation Assessment

Fundamental

Assessm

ent

A B C D E

5

4 4A3

2

1

Fundamental Grading of 4 indicates very stronfundamentals

Valuation Grading of A indicates significantl

undervalued on a relative basis

Key Stock Statistics

Bloomberg Code POWF In Equity

Current Market Price* (Rs.) 181

Shares Outstanding (crore)132.0

Market Cap (Rs. crore) 23917

52-Week High (Rs.) 224

52-Week Low (Rs.) 130

Free Float (%) 23%

Beta 1.20

6 Month Avg Daily Volumes Rs 7.14 cr

Source: Bloomberg

PFC: Current Valuations

Source: ICRA Online Estimates

Shareholding Pattern (31stMar-2012)

Source: BSE

Share Price Movement (18 months)

Source: NSE

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PFC NIFTY(RHS)

ICRA EQUITY RESEARCH SERVICE

POWER FINANCE CORPORATIONJuly 5 2012 Industry: Infrastructure Finance


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ICRA Equity Research Service Power Finance Corporation

2

SUMMARY

Preferred financier to the power sector, market share may increase going forward

PFC is strategically important to the GOI given the significant role it plays as a lead financier to the sector and also as a

nodal/routing agency for implementation of various government programmes to promote development in the power

sector. PFCs portfolio registered a robust growth over the past few years on the back of significant investmentdemand in the power industry. PFCs portfolio has expanded at a 5 year +CAGR of 24% to Rs. 1,30,071 crore as on

March 31, 2012, This share had been declining till FY2011, as during this period banks increased their lending to the

sector, however PFCs share increased in FY2012 from 21% to 22%. Going forward the banking system may not be

able to sustain their high pace of expansion in the sector, as several banks are hitting their industry exposure limits.

Therefore PFC would be in a position to increase its market share going forward.

Strong demand outlook to facilitate growth in portfolio, however significant policy measures and tariff hikes

required to facilitate investments

Given the existing deficit situation, and likelihood of continued growth in energy requirements, ICRA Online expects

an incremental capacity requirements of 95,000 MW by end of next XII Plan (until March 2017) and about 1,80,000

MW by end of FY 2022, assuming energy demand to grow at 6.5% per annum and loss levels to improve 1steadily .

Despite the good demand potential, following concerns could have a dampening effect over investments within the

industry.

Insignificant Tariff hikes in relation to cash losses

Uncertainties with respect to fuel linkages

Concerns regarding environmental clearances

Concerns regarding Land acquisition

Assuming reasonable policy action to address the power sector issues, we estimate investment requirements for the

generation segment alone during XII Plan period are expected to remain at over Rs. 5,00,000 crore. With equivalent

amount of investments requirements for Transmission & Distribution (T&D) segment, overall investment potential

thus remains high which further lead to large-sized debt funding requirements of over Rs. 7,00,000 crore, assuming

the funding mix (Debt: Equity at 70:30).

Issues faced by the power sector at present may not impact the growth prospects of PFC, as PFC had large un-

disbursed sanctions aggregating to over Rs. 1,83,616 crore as on March 2012. Against these outstanding sanctions,

ICRA Online estimates that PFC would be in a position to grow its portfolio at over 25% over the next three financial

years, assuming full disbursement against sanctions where disbursement has commenced, 75% disbursements where

documents have been executed and 40% disbursement against sanctions where disbursements are yet to commence.

Over the longer term growth opportunities of PFC would continue to remain healthy given the estimated PFC share of

financing in the next 5 year plan of over Rs. 1,20,000 crore. (over and above the unutlised sanctions of Rs 1,83,616

crore as on Mar-2012)

Competitive positioning supported by ability to take large exposures; however any future requirement to

comply with RBI exposure norms could restrict growth

PFCs large net worth (Rs. 20,708 crore as on March 31, 2012) has enabled it in the past to take large exposures onprojects, which has supported its competitive positioning. Furthermore within the state power sector PFC has

permission from RBI to formulate its own exposure norms; accordingly PFC can lend upto 150% of its net worth to a

single state sector utility, against upto 25% of capital funds (Tier 1 and Tier 2) for banks. However growth of PFC

could get constrained under the circumstance that it be required to adopt RBIs exposure norms2on its state sectorlending. Under such a scenario PFC would need to bring down its exposures to certain states and would constrain its

ability to take incremental exposures. However given the current paucity of funding available to sustain the proposed

investment in the power sector PFC could continue to be allowed more liberal lending norms. Stricter concentration

norms may force PFC to curtail exposures to better credit profile states, thus making it dependent on relatively weak

credit profile states for growth.

1 T&D Loss level at 29% for FY 2012 assumed to improve to 22% by end of FY 2022.2Current exemptions are valid till March 2013


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Share of Private sector exposures expected to increase

PFCs exposure to Independent Power Producers (IPPs) accounted for 11% of its total advances as on March 31, 2012.

Based on ICRA Online estimates, the share of portfolio towards IPP could increase to close to 20% over the next 3

financial years and further to around 30% of the total portfolio over the long term. While the increase in proportion of

exposures to the Independent Power Producers (IPP) segment would increase yield on portfolio, at the same time the

risk profile of PFC would increase.

Some deterioration in asset quality seen, however delays in policy action could trigger restructuring / higher

NPAs

PFC has observed some slippages in the current financial year and the Gross NPA% increased from 0.23% as on Mar-

2011 to 1.04% as on March 31, 2012 primarily on account of slippage in two large accounts Shri Maheshwar Hydel

Power Project(approx Rs 700 crore3) and Konaseema Gas Power(approx Rs 387 crore). While reported asset quality

indicators of PFC remain comfortable, 56% of the portfolio of PFC is where repayments have not started. Further,

with the rising share of private sector projects in the overall portfolio mix, the riskiness of the portfolio would

increase going forward.

Given the current concerns with respect to shortages of domestic coal availability and the deterioration in health of

state power utilities thereby increasing counter party risks on generating companies, asset quality indicators of PFC

may deteriorate. Despite these challenges PFC could still continue to maintain low NPAs because of default escrowmechanism in all cases, possibility of restructuring some accounts and differentiated4NPA recognition norms for state

government guaranteed exposures. Further, despite such possible deterioration in collections over medium term,

eventual losses from State Government entities could remain low.

Earnings expected to remain comfortable in medium term , some build-up in NPAs to be offset by higher

interest spreads

Earnings profile of PFC has in the past been supported by its healthy interest spreads, low operating expenses and low

credit provisions. We expect increase in share of private sector exposures(where yields are higher by 75-100 bps) and

repricing of assets to increase the overall yield on portfolio, however, some build-up in Non Performing Assets could

impact the overall yield on advances and hence spreads for the corporation. With infusion of equity through the

Follow on Public Offer in Q12011-12, leveraging levels of PFC have declined which would led to some moderation in

Return on Equity for 2011-12. However, PFC with its larger capital base is well poised to take advantage of the robust

growth opportunities offered in the power sector. ICRA Online expects PFC to maintain a return on equity of around18-19% over the medium term.

Valuation Rationale

PFC stock has been trading at a significant discount to various indices. Systemic concerns with respect to the overall

deteriorating financial health of PFCs main customers i.e. state power utilities, project delays and fuel linkages, have

contributed to the overall reduction in valuation multiples of the sector as well as PFC. The company has been trading

at a discount to its own historical prices. However, going forward considering the robust earning expectations for the

corporation, we expect the forward P/E ratio for the company to improve further going forward., ICRA Online has

assigned a valuation grade of A to PFC on a grading scale of A to E, which indicates that the company is significantlyundervalued on a relative basis.

3 Shri Maheshwar Hydel Power Project had got special dispensation to treat the project as standard upto March 31, 2012.

4A facility which is backed by the Central/State Government guarantee or by the State Government undertaking for deduction from central plan

allocation or a loan to State department , would remain standard for a period not exceeding 12 months from the date from whic h Companys dues

have not been paid by the borrower.


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Chart 1: Power Deficits and Incremental Capacity Requirements

BUSINESS AND COMPETITIVE POSITION

Key lender to Power Sector and strategically important to Government of India for development of the power

sector and implementation of Government programmes

PFC is strategically important to the GOI given the significant role it plays as a lead financier to the sector and also as a

nodal/routing agency for implementation of various government programmes to promote development in the power

sector. PFC is the nodal agency for routing of government grants under its Restructured Accelerated Power

Development and Reforms Programme (R-APDRP) programme and is also the nodal agency for development of

UMPPs (Ultra Mega Power Projects) in the country. This role, along with the ability to take larger exposures because

of its large Net worth (Rs. 20,708 crore as on March 31, 2012) and liberal exposure norms (for State Sector) has given

PFC significant leverage in the past to establish itself as the preferred financier in the power sector and has also

facilitated it in managing its portfolio quality while lending to inherently weaker credit profile state power utilities.

Strong demand outlook, however significant policy measures required to facilitate investments

Per capita consumption of power in India has grown from 566.7 kWh/year in fiscal 2003 to 733.5 kWh/year in fiscal

2009. The Government of India (GoI) has set a goal of 1,000 kWh per capita by fiscal 2012 in its mission of Power forAll by 2012 under the National Electricity Policy. GoIs programmes to drive power connectivity and healthy medium

term economic growth prospects are likely to continue to drive demand for power. Furthermore with the continued

growth in power demand and slippages in capacity addition have resulted in fairly high level of power deficit levels in

the country with the energy & peak deficits at 8.5% and 10% respectively in FY 2011. Given the existing deficit

situation, and likelihood of continued growth in energy requirements, ICRA Online expects an incremental capacity

requirements of 95,000 MW by end of next XII Plan Period (until March 2017) and about 180,000 MW by end of FY

2022, assuming energy demand at 6.5 % per annum on conservative basis.

Despite the good demand potential, following concerns could have a dampening effect over investments within the

industry. Relatively high counterparty credit risks associated with the consuming entity i.e. Discoms arising mainly out

of inadequate tariffs in relation to cost of supplies

Uncertainties with respect to fuel linkages and likely dependence on high cost imported coal which may

increase cost of supplies making power projects unviable.

Concerns regarding land acquisition and environmental clearances

Lately however, certain initiatives are being taken to improve the health of both the distribution and generation

entities. While it is uncertain how quickly and strictly these measures are going to be implemented, ICRA Online

derives comfort from the initiation of these steps.

4%

6%

8%

10%

12%

14%

16%

18%

FY' 04 FY' 05 FY' 06 FY' 07 FY' 08 FY' 09 FY' 10 FY' 11

Energy Deficit Peak Deficit

131121

246800

0

40,000

80,000

120,000

160,000

200,000

240,000

280,000

By March 2017 By March 2022

MW


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Key Steps initiated in the Distribution Sector

ATEs directive to SERCs aimed to enforce regulatory discipline for timely tariff determinationThe Appellate Tribunal for Electricity5 (ATE) issued a judgement in its order dated November 11, 20116 and in its

judgement has directed all State Electricity Regulatory Commission(SERCs) to initiate suo-moto proceedings for tariff

determination in case of delays by the utilities in filing of tariff petition. Key features of Appelate Tribunal for

Electricity(ATEs) directive are mentioned in Box 1.

Though this is a positive development on regulatory front for the power distribution sector. However, the impact of

this judgement by ATE on the financial position of the utilities will hinge upon its implementation by SERCs in an

independent manner without any kind of influence from the state government/utility. In addition to this, poor data

availability, given the significant delays in the finalisation of accounts as well as operational in-efficiencies in energy

audit system in some cases, could also pose a constraint for initiation of such tariff proceedings by SERCs themselves.

5In line with the provision of Electricity Act (EA)2003, Central Government has established an Appellate Tribunal to be known as the Appellate Tribunal

for Electricity to hear appeals against the orders of the adjudicating officer or the Appropriate Commission. As per the section 121 of EA-2003, The

Chairperson of the Appellate Tribunal shall exercise general power of super-intendance and control over the Appropriate Commission.6 A suo-moto request petition was initiated by Ministry of Power, Government of India to ATE in January 2011, so that ATE can exercise its regulatory

authority under section 121 of the EA-2003 to provide directions to all SERCs.

Box 1: Salient Features of ATEs Order dated November 11, 2011

It should be the endeavour of every State Commission to ensure that the tariff for the financial year is decided

before 1st

April of the tariff year, for which tariff petition should be filed by end of November of the previous

year. Truing-up should also be an annual exercise.

In the event of delay in filing of the ARR, truing-up and Annual Performance Review, one month beyond the

scheduled date of submission of the petition, the State Commission must initiate suo-moto proceedings for

tariff determination.

The recovery of the Regulatory Asset (RA) should be time bound and within a period not exceeding three years

at the most and preferably within control period. Carrying cost of the RA should be allowed to the utilities in

the ARR of the year in which the RA are created to avoid problem of cash flow to the distribution licensee.

Fuel and Power Purchase cost is a major expense of the distribution Company which is uncontrollable. The Fuel

and Power Purchase cost adjustment should preferably be on monthly basis but in no case exceeding a

quarter. Any State Commission which does not already have such formula/mechanism in place must within 6

months of the date of this order must put in place such formula/ mechanism.


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Finalisation of the Shunglu Panel report; implementation would prove to be a challenge

A Panel headed by Shri V. K. Shunglu, appointed by the Planning Commission in July 2010 (with an objective of study

to suggest measures for improvement in the commercial viability of distribution sector) issued the report7 on financial

position of distribution utilities in December 2011. This Committee has given several recommendations on the way

forward which are highlighted in Box 2:

However, implementing the recommendations could be particularly challenging, given that several stakeholders like

discoms, state governments and regulatory entities (SERCs) should need to be involved. Also there is no clarity on

what the RBIs view is on what is perhaps the most important recommendation of the Committee, namely purchase ofloans under stress which are on the books of banks by new SPV (proposed to be 76% held by RBI).

7The report has assessed a) the financial position of distribution utilities between FY 2005 and FY 2010, b) electricity tariff determination

process including roles of State Government, SERCs and utilities, c) system improvement measures & operational issues and d) action

plan to achieve the financial viability for distribution sector by 2017.

Box 2: Key Recommendations by the Shunglu Committee

SPV to be set up as a corporate entity (76% held by RBI and balance by PFC & REC), which will be entitled to purchase loans

(which are likely to be restructured) of the banks, subject to certain conditions.

o These conditions include a) banks to negotiate with the state government/utility for revised payment schedule and

b) state government to agree upon regular tariff increase, operational plan to meet certain technical/ operational

performance parameters and implementation of capital expenditure for system improvement as a first priority.

o RBI would provide a line of credit to SPV for purchase of loans from the banks. In case of non-compliance of terms

set by SPV, the state government undertaking should be available to RBI that the amount defaulted would be

debited to the State Governments Account with RBI. Thus, intentional default or non-adherence to the action

plan would be unlikely.

Recommendations on the process of tariff determinationare reiterated as per the directives of ATEs judgement

In addition to basic tariff (which is fixed taking into account of targeted loss levels by SERCs), a loss surcharge should also be

leviedwhich can vary area-wise within the license area so as to bring consumer awareness and improve the accountability of

the utilitys staff.

Selection committee for SERC should be broad based so as to make the selection process fair, objective and independent.Committee

1to be appointed for oversight of the functioning as well as periodic evaluation of the performance by the SERCs ,

with a main objective to ensure the accountability of the regulators.

Distribution Franchisee Modelwould be the way forward on urgent basis for the utilities to bring down their distribution loss

levels significantly, this should be extended to the states during the next few years to at least 255 towns which seem to

account for over 40% of the consumption.

R-APDRPscheme is a key step taken by Central Government to reduce the distribution losses, and should be extended to the

next Plan period with applicability to all to towns above 30,000 populations based on Census 2011.

Utilities need to have in-house core team of IT experts in the organisation who can work with IT consultants appointed

under R-APDRP, as well as, there is a need of proper HRD department& of skilled professionalsin the Finance department.


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Tariff revisions observed in many states during FY 2011-12, although with delays; more states adopt FPPCA

principles, though principles and implementation continue to vary

Several states have seen tariff revision during

the FY 2011-12 as seen in Chart 2. While this is

a positive, ICRA Online notes that bulk of these

tariff revisions (for FY 2011-12) happened well

after the due date which was March 31, 2011.Further, in a number of states tariff/ARR

petitions for FY 2012-13 & true-up petitions

for FY 2010-11 (as per MYT regulatory

framework) are yet to be filed with SERCs,

whereas the same should have been filed by

November 30, 2011. There have also been

instances of roll-back of previous tariff-hike

during FY 2011-12 as observed in state of West

Bengal which led to adverse impact on the

financial & liquidity position of its distribution

utility, and such risk of regulatory uncertainty

cannot be ruled out in future for other states.

Also, the extent of tariff revision has beenvaried, from as low as 0.4% to 24%, and is

inadequate to meet the actual cost of supply in

many states, thus resulting in large uncovered

revenue deficits, also termed as regulatory

assets. Such deficits remain unsustainable for

some of the discoms in states such as Tamil

Nadu, Rajasthan, Punjab, Haryana & Uttar Pradesh where recovery of such past dues or regulatory assets is expected

to happen over a prolonged period i.e. three to five years, so as to also avoid a tariff shock. Under such circumstances,

recent tariff hikes announced for the discoms by respective SERCs in Bihar (~12%) , (~ 37%) , Delhi (~26%), for FY

2012-13 remain key positives, which will further improve the cash flows of such discoms in the near term. However,

adequacy of tariff revision and periodicity on annual basis remains extremely critical for sustained improvement in

the financial performance of such discoms, going forward. Further, a number of major states such as Gujarat,

Maharashtra, AP, Rajasthan, Punjab, Haryana, West Bengal and Delhi have also put in place fuel price & powerpurchase cost adjustments (FPPCA) although the implementation varies from state to state. With this, regular pass-

through of FPPCA in retail tariff (and in the case of agriculture consumption, through increased subsidy from the state

government) also remains very crucial for discoms from their credit/liquidity perspective.

Key initiatives for the Generation Sector

As regarding generation, the GoI has constituted a Committee of Secretaries (CoS) to work out a time bound action

plan to resolve issues with respect to fuel shortage, mismatches between fuel price and tariffs committed under

existing competitively bid tariffs and permitting risks (including environmental clearances and land acquisition).

Some of the key proposals which are being considered are as follows:

GoI to ensure fuel security for power projects. Key features:

Coal India to sign Fuel Supply Agreements(FSA) with power plants likely to be completed byMar 2015 , for projects completed by Dec 2011, FSAs to be signed by March 2012.

The FSAs will be signed for full quantity of coal mentioned in the Letters of Assurance (LoAs)

for a period of 20 years with trigger level of 80% for levy of disincentive and 90% for levy of

incentive, FSAs to be for full quantity for 20 years- penalty/incentive clauses applicable.

In case of shortfall in domestic coal availability, Coal India Limited will import coal, which

will be supplied to power producers albeit at the actual cost of such supplies.


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Independent Power Producers (IPPs )supplying power on cost plus basis or competitive bid

basis to be treated at par with public sector units in terms of prioritising future supplies.

GoI to address issue of mismatch between tariffs and cost of generation :

Competitive bidding guidelines to be modified new bidding guidelines to be announced

shortly.

GoI to speed up environmental and other bottlenecks hampering implementation of power plants

and coal blocks

While, ICRA Online believes that the aforementioned steps are a positive, some risks still remain. While obliging CIL to

meet commitments by importing coal if necessary will ensure fuel security this will result in increased cost of

generation for power projects. Secondly, while changes in competitive bidding norms- under which it is expected that

bidders will have to quote only capacity charges and station heat rates- may result in lower risks for plants which are

yet to have signed PPAs, it is unclear whether these guidelines will apply to projects which have already signed PPAs

at very low rates.

We estimate investment requirements for the generation segment alone during XII Plan period are expected to

remain at about Rs. 5,00,000 crore. With equivalent amount of investments requirements for Transmission &

Distribution (T&D) segment, overall investment potential thus remains high leading to large-sized debt fundingrequirements of over Rs. 7,00,000 crore, assuming the normative funding mix (Debt: Equity at 70:30). At a 25%

market share, and assuming actual investments of 70% of total funding requirements, PFC would have opportunities

to disburse over Rs. 1,20,000 crore in the next 5 year plan (2012-17). (over and above the undisbursed sanctions of

Rs. 1,83,616 crore as on March 2012)

Table 1: Potential share of funding by PFC under the XIIth Five Year Plan

XII thplan estimate

Total potential debt funding requirement 7,04,900

Actual achievement 70%

Estimated requirement of debt 4,93,430

PFC market share 25%

PFC share of financing in XII th plan 1,23,358Source: ICRA Online estimate

Amount in Rs. Crore


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Large undisbursed sanctions could help PFC maintain its growth trajectory in medium term

PFCs portfolio has registered a robust growth over the past few years on the back of significant investment demand in

the power industry. PFCs portfolio has expanded at a 5 year CAGR of 24% to Rs. 130209 crore as on March 31, 2012.

In addition to PFC, the lenders to the power sector include other specialized lending agencies and banks. As March 31

2012, as per an ICRA Online estimate, out of a total power sector credit of around Rs. 5,90,000 crore, PFCsportfolioconstituted an overall share of 22%. This share had been declining till FY2011, as during this period banks increased

their lending to the sector, however PFCs share increased in FY2012 from 21% to 22%. Further, a considerable

amount of the funding from banks has been working capital loans therefore PFCs market share in project

financing would be higher at around 25%. During March-2006 to March-2011, banks power sector exposure has

grown faster at 5 year CAGR of 35% (compared to PFCs 23% during the period) , however growth slowed down to22% in FY2012. Going forward the banking system may not be able to sustain their high pace of expansion in the

sector, as several banks are hitting their industry exposure limits. Therefore going forward PFC could be in a position

to maintain its market share.

Table 2: Profile of outstanding sanctions of PFC as on March 31, 2012

Source: PFC Investor Presentation March 2012

Amount in Rs. crore

Further, PFC had large un-disbursed sanctions aggregating to over Rs. 1,83,616 crore as on March 2012. Out of the

total undisbursed sanctions, around 47% (or Rs. 86,439 crore) are sanctions where disbursements have commenced,

while out of the balance, as per PFCs internal analysis, around 95% pertain to sanctions done over the past3 years.

Against these outstanding sanctions, ICRA Online estimates that PFC would be in a position to grow its portfolio at

Documents executed

and & disbursement

commenced

Document executed

but disbursement

not commenced

Document

not executed

Total

outstanding

sanctions

State 60,415 22,630 46652 129,697

Central 3723 181 2,632 6,536

Joint 6,266 400 0 6,666

Private 13,580 13,026 14,109 40,715

Total 86,439 26,536 69,039 183,616

Chart 3: Growth in domestic credit to power sector Chart 4: Movement in market share of domestic funding t

Power Sector

Source: Company and ICRA Online Research, Amounts in s. 000 crore

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100

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300

400

500

600

700

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Total Credit to power sector (RHS) GrowthPFC Credit

Grow th Banki ng Credi t to Pow er s ector Grow th T otal Credi t to Pow er S ector

Growth Overall Credit Banking sector

28% 28% 26% 26% 23% 21% 22%

19% 20% 20% 20%19%

17% 17%

5% 5% 6% 5%5%

6% 5%

47% 47% 48% 49% 54% 56% 56%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-1

PFC REC IDFC Banks


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over 25% over the next three financial years, assuming full disbursement against sanctions where disbursement has

commenced, 75% disbursements where documents have been executed and 40% disbursement against sanctions

where disbursements are yet to commence. Over the longer term growth opportunities of PFC would continue to

remain healthy given the estimated PFC share of financing in the next 5 year plan of over Rs. 1,20,000 crore.

Competitive positioning supported by ability to take large exposures; however any future requirement to

comply with RBI exposure norms could restrict growth

As on March 31, 2012 PFC had a Net worth of Rs. 20,708 crore, which is amongst the largest within financialinstitutions in India. PFCs large net worth has enabled it in the past to take large exposures on projects, which hassupported its competitive positioning. Furthermore within the state power sector PFC has permission from RBI to

formulate its own exposure norms; accordingly PFC can lend upto 150% of its net worth to a single state sector utility,

against upto 25% of capital funds (Tier 1 and Tier 2) for banks. Although in the case of private sector exposures PFC

does adopt the RBIs exposure norms8, its large net worth and corresponding ability to take large exposures would

continue to benefit its growth prospects given GoIs focus on meeting power generation targets by encouragingprivate sector promoted ultra mega power projects, which would require large single party funding requirements.

However growth of PFC could get constrained under the circumstance that it be required to adopt RBIs exposurenorms on its state sector lending. Under such a scenario PFC would need to bring down its exposures to certain states

and would constrain its ability to take incremental exposures. However given the current paucity of funding available

to sustain the proposed investment in the power sector PFC could continue to be allowed more liberal lending norms.

New Businesses Planned

While in the past PFC has primarily financed generation projects (84% of total portfolio), the corporation over the

medium term plans to diversify into new segments including projects with backward linkages to the power sector

(power equipment manufacturers, mining, gas pipe lines etc) and promoter equity financing. Furthermore PFC in the

current financial has setup a 100% subsidiary PFC Green Energy Private Limited in order to streamline the focus on

tapping the growth potential in renewable energy segment; through this vertical PFC intends to focus on small hydro

generation, solar and wind power generation projects. PFC enjoys strong relationships and knowledge of assessing

projects in the power sector which it should be in a position to leverage as it attempts to expand the scope of its

lending operations.

Rising share in the private sector exposures

Chart 5 Expected Sector wise Portfolio MixAs on March 31, 2012 PFCs exposure to IPPs

accounted for 11% of its total advances.

Based on ICRA Online estimates, the share of

portfolio towards IPPs could increase to close

to 20% over the next 3 financial years while

to around 30% of the total portfolio over the

long term. While the increase in proportion of

exposures to the IPP segment would increase

yield on portfolio (as yields for IPPs are

higher to yields on state level entities by 50-

75 bps); at the same time the risk profile of

PFC could increase given the current

challenges in operating environment. Out ofPFCs total private sector exposure of Rs.

14737 crore as on March 31, 2012 Coal based

IPPs have the maximum contribution of 66%,

followed by Gas based IPPs at 12%, Hydro

power based IPPs at 10%. Renewable power

8 In the case of NBFC- Infrastructure Finance Company (IFC), the maximum single party exposure is to be restricted to 25% of net

owned funds and in the case group exposures restricted to 40% of net owned funds,

0%

5%

10%

15%

20%

25%

30%

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

Mar-09 Mar-10 Mar-11 Mar-12(e) Mar-13(e) Mar-14(e)

Private Sector State/Central/Joint Sector

Growth in Portfolio Proportion of Private Sector Exposure


11/31


11

based IPPs and others being 12%. However, if we were to include the partially disbursed amounts (likely

disbursement going forward) going forward the share of thermal power IPPs could increase to around 77% over the

next three years.

Source: Company and ICRA Online Research

The IPPs would be subject to the following risks

Fuel Supply Risks- Based on a weighted average9analysis of PFCs outstanding exposure in Thermal IPPs, close to67% of this exposure is dependent on the domestic coal. Domestic coal based capacities, largely based on output from

Coal India Limited (CIL) and its subsidiaries are likely to be subject to significant fuel supply risks arising out of

significant shortages that are expected in the near foreseeable future. However, recent initiatives taken by the

government are likely to reduce the risks

Power Purchase Agreement (PPA) related Risk- Based on a weighted average3 analysis of PFCs exposure inThermal IPPs, around 68% of this exposure is based on competitively bid based PPAs. In a domestic coal deficit

situation, rising dependence on coal imports would keep a significant upward pressure on the cost of power

generation. This is likely to adversely affect the project economics of competitively bid based PPAs essentially due to

under recoveries of the actual fuel costs.

Merchant tariff volatility risks- Based on a weighted average3analysis of PFCs exposure in Coal Based IPPs close to

14% of PFCs exposure is under merchant sales wherein either there is a short-term PPA or it is untied, therebyexposing it to any adverse volatility in the merchant tariffs.

Counter Party risks- Overall the operating and financial position of state-owned distribution companies continues to

remain weak. High aggregate book losses for key states, exposes the IPPs to significant counter-party credit risks.

9 Weighted averages are based on the outstanding amount and the amount yet to be disbursed in partially disbursed cases

Chart 6: Profile of existing private sector exposure (in terms

of amount outstanding as on 31stMarch 2012)

Chart 7: Expected Profile of Private Sector Portfolio assuming full disbur

partially disbursed sanctions as on 31stMarch 2012

Coal Based

66%

Gas Based

12%

Hydel

10%

Wind , Solar ,

Bio Mass and

others

12%

Hydel IPP

7%

Gas Based IPP

7%

Wind Solar and Bio Mass

IPP

7%Domestic C

67%

Imported C

17%

Domestic

Coal

Coal Based IPP

77%


12/31


12

Chart 8: Outstanding exposure to projects under moratorium

Portfolio

where

Repayments

has started

44%

Portfolio

where

Repayments

have not

started

56%

Further, Hydro power based IPPs contribute close to 14% of the PFCs total exposure to the private sector. Most of

these projects are at a relatively early stage of implementation which exposes these projects to significant project

execution risks. PFCs hydro IPP portfolio includes an exposure to Shri Maheshwar Hydel Power Project, in Madhya

Pradesh which slipped into NPA category as on March 31, 2012

Good asset quality so far, however lack of policy action could trigger restructuring / higher NPAs

Table 3: NPA movement of PFC

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Gross NPA 13 13 13 231 1358

Net NPA 7 6 6 195 1215

Gross NPA (%) 0.03% 0.02% 0.02% 0.23% 1.04%

Net NPA (%) 0.01% 0.01% 0.01% 0.20% 0.93%

Source: Company and ICRA Online Research, Amount in Rs. Crore

PFC has observed some slippages in the current financial year and the Gross NPA% increased from 0.23% as on Mar-

2011 to 1.04% as on March 31, 2012 primarily on account of slippages in Shri Maheshwar Hydel Power Project and

Konaseema Gas Power. While reported asset quality indicators of PFC remain lower than banks, ICRA Online, notes

the substantial proportion of PFCs outstandingportfolio is under moratorium (where principal

servicing is yet to commence). Given the

concerns with respect to shortages of domestic

coal availability and the deterioration in health

of state power utilities thereby increasing

counter party risks on generating companies,

there could be some slippages in the medium

term. Despite these challenges PFC could still

continue to maintain low NPAs because of the

following:

Default escrow mechanism Possibility of restructuring

Different NPA recognition norms10 for

state government guaranteed exposures

Further Despite such possible deterioration in collections over medium term, eventual losses from State Govt

entities could remain low.

10 A facility which is backed by the Central/State Government guarantee or by the State Government undertaking for deduction from

central plan allocation or a loan to State department , would remain standard for a period not exceeding 12 months from the date fromwhich Companys dues have not been paid by the borrower.


13/31


13

FINANCIAL OUTLOOK

Diversified resource profile

Table 4: Borrowing Mix for PFC


Bonds 35,479 68% 45,801 68% 56,137 66% 74299 74%

Foreign Currency Loans 2,590 5% 2,759 4% 4,963 6% 5969 6%

Term Loans from Banks/ LIC 12,692 24% 16,223 24% 18,208 21% 15345 15%

Short Term Borrowings 1,400 3% 2,325 3% 6,291 7% 4308 4%

Total 52,160 100% 67,108 100% 85,599 100% 99,920 100%

Cost of funds 9.25% 7.99% 8.23% 8.63%

Cost of funds (excluding foreign

currency translation gains/losses

8.72% 8.16% 8.20% 8.46%

Source: PFC and ICRA Online Research

Amount in Rs. Crore

PFC enjoys a strong financial flexibility and raises long term funds at competitive rates. PFC largely raises funds from

the financial market through issuance of long term debentures, which accounted for 74% of total borrowings of the

corporation as on March 31, 2012. Given its sovereign ownership, its highest credit quality ratings and the strong

relationship it enjoys amongst financial institutions, PFC enjoys funding at competitive rates. During FY2012,PFC

raised Rs. 33000 crore(approx) of bonds at weighted average incremental cost of around 9.30%. Besides long term

bonds, PFC has in the past tapped the banking system for funding and has been raising funding through this channel at

base rate. Further, PFC raised Rs 5000 crore through tax free bonds in January 2012 at 8.30% crore in 2011-12, which

would support the corporation in maintaining its competitive funding profile.

In the current financial year the increasing

interest rate scenario has led to an increase in

cost of funds of PFC. However PFC as an

Infrastructure Finance Company (IFC), is

permitted to raise low cost External Commercial

Borrowings (ECBs) upto 50% of its net worth

through the automatic route. PFC in the past has

left a substantial portion of its foreign currency

borrowings un-hedged for currency variations,

which exposes it earnings profile to exchange rate

risks. However a bulk of such borrowings has

longer tenures (around 85% mature after March

2015), which mitigates the risk to an extent.

Chart 9: Quarterly movement of PFCs incremental cost on long

term bonds viz.a.viz. 10 year benchmark G-sec

Source : Company and ICRA Online Research

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q12012 Q22012 Q32012 Q42012

PFC's Incremental cost of long tem bonds 10 year benchmark G-Sec


14/31


14

Although PFC has a good standing to raise funding from institutional investors at market competitive rates, PFC does

remain at a disadvantage viz.a.viz. banks without access to funding through low cost Current and Savings

Account(CASA deposits). However, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements for

banks reduce the disadvantage to some extent. Besides banks, Rural Electrification Corporation (REC) is a close

competitor to PFC; historically REC has enjoyed lower funding costs than that of PFC with permission from GoI to

raise low cost Capital Gains Bonds (54 EC bonds). However the gap between cost of funding for both corporations has

been narrowing over the past few years as the share of funding through Capital gains bonds for REC has been

declining. On an incremental basis both PFC and REC are able to tap wholesale funding (excluding Capital gainsbonds) at similar rates on the back of their sovereign ownership and highest credit ratings.

Low operating expenses support competitive positioning


Notwithstanding the higher funding costs, competitive positioning of PFC is supported by its low operating expense

level, on the back of the wholesale nature of its lending business and lean operations. Operating expense level of PFCis amongst the lowest in the industry and after adjusting the same for cost of funding, PFC cost of lending 11converges

close to that of banks. Given the lower operating expenses and higher yielding portfolio, both PFC and REC, enjoy

higher Net Interest Margins (NIMs) viz.a.viz banks. However RECs, NIM Operating Expenses, remain higher thanthat of PFC on account of its lower cost of funds.

11(Interest Expenses + Operating expenses) /Average Borrowings

Chart 10: Cost of funds Chart 11: Operating Expenses by Average Total Assets

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

FY2008 FY2009 FY2010 FY2011 FY2012

PFC REC PSU Banks Private Banks

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

FY2008 FY2009 FY2010 FY2011 FY2012



15/31


15


Stable earnings profile supported by low operating expenses and credit provisioning

Table 5 Key Financial Ratios

Mar-12 Mar-13e Mar-14e

Gross Interest Spreads 2.24% 2.45% 2.43%

NIM 3.53% 3.70% 3.53%

Other Income/ ATA 0.12% 0.14% 0.12%

Operating Expenses / ATA 0.11% 0.10% 0.09%

Operating Profit/ATA 3.54% 3.73% 3.56%

Provisioning / ATA 0.12% 0.16% 0.06%

ROA 2.52% 2.63% 2.59%

ROE 16.89% 18.33% 19.80%

EPS 22.97 30.96 38.81

PAT 3,032 4,087 5,123

Net worth 20,708 23,874 27,856

Gross NPA% 1.04% 1.08% 1.17%

Net NPA% 0.93% 0.85% 0.94%

Net NPA/Net Worth 5.87% 5.98% 7.06%

Advances 130,072 167,793 209,741

ATA: Average Total Assets, e ICRA online estimatesSource: PFC Annual accounts and ICRA Online Research

Earnings profile of PFC has in the past been supported by its healthy interest spreads, low operating expenses and low

credit provisions. We expect increase in share of private sector exposures (where yields are higher by 75-100 bps) to

increase the overall yield on portfolio. Further a large proportion of PFCs exposures would get repriced over the next

4 quarters which would move the yields upwards and lead to improvement in interest spreads to around 2.50% in

Chart 12: Cost of lending Chart 13: Net Interest Margins less Operating Expenses

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

9.00%

9.50%

10.00%

FY2008 FY2009 FY2010 FY2011 FY2012


0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

FY2008 FY2009 FY2010 FY2011 FY2012



16/31


16

FY2013 and 2.54% in FY2014. Net Interest Margins (NIMs) of PFC are also expected to improve inline with

improvement in interest spreads. Operating expenses in relation to asset base of PFC are likely to remain in line with

previous year levels of 0.10%, which would lead to improvement in operating profitability of PFC in FY2013. Credit

provisions are likely to increase going forward. However, PFC with its larger capital base is well poised to take

advantage of the robust growth opportunities offered in the power sector. ICRA Online expects PFC to maintain a

return on equity of around 18-19% over the medium term.

In line with the NIM Operating expense, both PFC and REC enjoy higher Return of Assets than Banks. RECs

profitability indicators are superior to PFC owing to higher Net Interest Margins.

Fee income expected to increase from present levels

PFC is the nodal agency to operationalise the Restructured Accelerated Power Development and Reforms Programme

(R-APDRP) launched by GoI with a focus on reducing AT&C losses. The government outlay under this programme is

Rs.51,577 crore, and PFC has been appointed as an appraising agent for such projects, for which it receives a fee of 1%

of all sanctions (booked in 3 tranches, 0.3% for sanction, 0.3% for disbursement and 0.4% for monitoring) besides

receiving re-imbursements of operating expenses. This translates into a total fee income potential of ~ Rs. 875 crorefor PFC, out of which the corporation booked income of Rs. 89.62 crore in 2010-11 and Rs. 39.15 crore in FY2012.

While the current scheme is applicable to projects in towns with population of over 30,000 (10,000 in the case of

Special Category States), going forward proposals by the GoI to bring down this population eligibility would further

enhance the scope for PFC to earn fee income.

In addition to the R-APDRP scheme. PFC is also designated as the nodal agency by GoI to facilitate the development

and construction of UMPPs in India, i.e. Ultra Mega Power Projects with a c ontracted capacity of 3,500 MW or higher.PFC has identified projects for 16 such UMPPs and accordingly12 SPVs in the form of wholly owned subsidiaries of

PFC have been incorporated to undertake preliminary site investigation activities necessary for preparation of project

information reports, and obtain applicable linkages, clearances and approvals required for conducting a tariff based

competitive bidding process for selection of developers for the UMPPs. Upon transfer to a developer PFC charges a

fee of Rs. 50 cr (against Rs. 15 crores in the past) and claims re-imbursements of expenses from the developer.

PFC is also looking to leverage its strong expertise of the power sector to expand its fee based services to include

project advisory services and debt syndication of power sector projects. In light of PFCs established presence in the

power sector ICRA Online expects PFC overall earnings to be supported by healthy fee income growth.

Chart 15: Movement of Return on EquityChart 14: Movement of Return on Assets

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

FY2008 FY2009 FY2010 FY2011 FY2012


0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

FY2008 FY2009 FY2010 FY2011 FY2012



17/31


17

OTHER SUBSIDIARIES AND ASSOCIATESPFC Green Energy Limited (PFCGEL)

PFCGEL is a wholly owned subsidiary of our Company. PFCGEL was incorporated on March 30, 2011. Through this

entity PFC intends to streamline its focus in the emerging renewable energy segment- the company is expected to

focus on small hydro, solar and wind generation projects

PFC Consulting Limited (PFCCL)PFCCL is a wholly owned subsidiary of PFC and was incorporated on March 25, 2008. Through this entity PFC offers

project advisory services to power sector entities

GOVERNANCE STRUCTURE

PFC is managed by a 10 member Board, which includes five independent directors, one Government Nominee

Director and 4 Functional Executive Directors (including the Chairman). GoI holds a 73.72% stake in the corporation

and the rest is widely held and includes institutional investors. The disclosures in PFC Annual Report are adequate

and have been broadly in line with that followed by the industry.


18/31


18

0

100

200

300

400

500

600

700

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Rs.

/share

Stock Price PB - 1x PB - 2x PB - 3x

VALUATION GRADING

In assessing a company's valuation, various parameters are looked at including the company's earnings and growth

prospects; its ability to generate free cash flows and its capacity to generate returns from the capital invested. The

valuation is also benchmarked against an appropriate peer set or index. The opinion on a company's relative valuation

is expressed using the following five-point scale as follows:

Exhibit 1: ICRA Equity Research ServiceValuation Grades

While assessing a company's relative

valuation, the historical price volatility

exhibited by the stock, besides its liquidity, is

also taken into account. The extent of

overvaluation or undervaluation is adjusted

for the relative volatility displayed by the

stock.

Valuations - Historical Comparison

PFC has historically traded in a band of 1X to 3X on the 12 months forward P/B basis and in a 5X to 15X band on

forward P/E basis, mainly. As shown below, the valuation multiples of the company are currently trading at the lower

end of its long term average at 0.95 forward P/B multiple and at a 5.43 forward P/E multiple. Systemic concerns with

respect to the overall deteriorating financial health of PFCs main customers i.e state power utilities, project delaysand fuel linkages , have contributed to the overall reduction in valuation multiples of the sector as well as PFC.

Source: Bloomberg, ICRA Online Estimates

Valuation Grade Grade Implication

A Significantly Undervalued

B Moderately Undervalued

C Fairly Valued

D Moderately Overvalued

E Significantly Overvalued

Chart 16: Forward P/B Band Chart 17: Forward P/E Band

0

100

200

300

400

500

600

700

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Rs.

/share

Stock Price PE - 5x PE - 10x PE - 15x PE


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19

Relative Valuations Index and Peer Comparison


While historically PFC had traded at a similar 12 month forward P/B ratio as the Bank Nifty Index, as already

discussed PFCs has been trading at a significant discount with the indexes. However, going forward considering the

robust EPS growth expectations for the corporation, we expect the forward P/E ratio for the company to improve

further going forward.

Table 6: Relative Valuations Vs Equity Indices:

PFC NIFTY INDEX* BANK NIFTY* CNX PSU BANK

INDEX*

FY13e FY14e FY13e FY14e FY13e FY14e FY13e FY14e

Price/Earnings 4.61 3.97 11.51 10.70 9.42 9.35 5.34 4.72

Price /Book

Value

0.85 0.72 1.90 1.73 1.51 1.44 0.87 0.77

* Bloomberg Consensus as on July 5, 2012

Chart 18: Index Comparison: Forward P/B Chart 19: Index Comparison: Forward P/E Ratios

Source: Bloomber and ICRA Online Estimates

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

NSE S&P CNX NIFTY INDEX BANK NIFTY INDEX CNX PSU BANK INDEX PFC

0

5

10

15

20

25

30

Mar-

07

Jun-0

7

Sep-0

7

Dec-

07

Mar-

08

Jun-0

8

Sep-0

8

Dec-

08

Mar-

09

Jun-0

9

Sep-0

9

Dec-

09

Mar-

10

Jun-1

0

Sep-1

0

Dec-

10

Mar-

11

Jun-1

1

Sep-1

1

Dec-

11

Mar-

12

NSE S&P CNX NIFTY INDEX BANK NIFTY INDEX CNX PSU BANK INDEX


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20

Relative Valuations Peer Comparison

PFCs closest competitor, REC is also a state sponsored specialized lender to the sector. While both PFC and REC have

been trading at a discount to the industry peers and index, P/B multiple for REC and PFC are similar as both

companies are evenly poised to leverage the strong growth opportunities offered in the power sector.

Table 7: Relative Valuations Vs Peer Valuations:

PFC REC* IDFC* PNB* BOB*

FY13e FY14e FY13e FY14e FY13e FY14e FY13e FY14e FY13e FY14ePrice/Earnings 4.61 3.97 5.11 4.40 9.60 8.12 4.81 3.76 4.91 4.31

Price /Book Value 0.85 0.72 0.89 0.76 1.40 1.26 0.78 0.64 0.85 0.73


* Bloomberg Consensus Estimates as on Jjuly 5, 2012

Chart 20: Peer Comparison: Forward P/B Ratios Chart 21: Peer Comparison: Forward P/E Ratios

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

PFC REC IDFC BOB PNB

0

5

10

15

20

25

30

35

40

PFC REC IDFC BOB PNB


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21

Annexure 1COMPANY PROFILE

PFC is a specialized Development Financial Institution, which was set up in 1986 with the objective of funding projects

in the domestic power sector. PFC provides loans for a range of activities from generation to distribution,

transmission, renovation and maintenance and other related activities. PFC finances state sector entities such as State

Electricity Boards (SEBs) and State Generating Companies (SGCs) and Independent Power Producers (IPPs). In

addition, PFC has been appointed as the nodal agency to develop sixteen Ultra Mega Power Projects (UMPPs).

Exhibit 2: Company Factsheet

Name of the Company Power Finance Corporation (PFC)

Year of IncorporationJuly 1986

Corporate Status Public Limited Company

Registered Office Urjanidhi, 1 Barakhamba Lane

New Delhi - 110 001

Nature of Businesses Development Finance Institutuion for financing power sector including power

generation, transmission, distribution, grid strengthening, renovation and

maintenance, sector studies etc

Auditors M/S N K Bhargava and Co and Ms Raj Har Gopal and Co

Board of Directors

Mr. Satnam Singh Chairman and Managing Director

Mr. M K Goel Director(Commercial)

Mr. R Nagarajan- Director ( Finance)

Mr. Devendra Singh Government Nominee DirectorMr. P Murali Mohana Rao Independent Director

Prof Ravindra H Dholakia Independent Director

Mr. S C Gupta Independent Director

Mr. Ajit Prasad Independent Director

Mr. Krishna Mohan Sahni Independent Director

Key subsidiariesPFC Consulting Limited, PFC Green Energy Limited, PFC Capital Advisory Services

Limited

Key Joint Ventures National Power Exchange Limited, ,Energy Efficiency Services Limited


22/31


22

Annexure 3: PFC PORTFOLIO MIX

Weak financial health of State electricity boards is a concern; however limited exposure to more vulnerable

distribution companies, government guarantees and default escrow have served as risk mitigants

While liberal state sector lending norms have enabled PFC to expand, the corporation is exposed to concentration

risks, with exposures to state power utilities in 5 states accounting for 40% of total advances. PFC, given its position

as a major financier of state power sector utilities, as well as its close association with the Ministry of Power (MoP) as

a routing agency for its power development programmes has in the past maintained a good track record over

recoveries from such financially weak state power utilities; however the continued deterioration in financial health of

such entities is a concern. Factors such as slow pace of reforms and loss reduction coupled with increasing cost of

supplies without commensurate increase in tariffs have led to large and increasing cash losses for state power

utilities.

Table 8: Sector-wise credit portfolio of PFC


State sector 46,443 54,142 64,509 81480

Central Sector 9,283 15,015 20,300 24691

Joint Sector 4,360 6,525 7,991 9302

Private Sector 4,335 4,179 6,801 14737

Total 64,421 79,861 99,601 130,209

Growth in credit

portfolio

25% 24% 25% 31%

As % of Total

State Sector 72% 68% 65% 63%

Central Sector 14% 19% 20% 19%

Joint Sector 7% 8% 8% 7%

Private Sector 7% 5% 7% 11%

Source : Company

Amount in Rs. crore

As on March 31, 2012 PFCs exposure to state utilities companies accounted for 63% of its total portfolio..

Table 9 : Segment-wise credit portfolio of PFC

Mar-09 % Mar-10 % Mar-11 % Mar-12 %

Generation 52,345 81% 67,013 84% 84,294 84% 107,426 83%

Distribution 6,494 10% 6,284 8% 4,701 5% 5,667 4%

Transmission 3,410 5% 3,402 4% 7,596 8% 9,922 8%

Others 2,172 3% 3,163 4% 3,010 3% 7,195 6%

Total credit portfolio 64,421 79,862 99,601 130,209Source : Company

Amount in Rs. crore

Based on an ICRA Online assessment on the financial health of power sector utilities in various states, it is estimated

that around 31% of PFCs total portfolio (as on March 2012 was deployed in states with relatively financially weak

power sector utilities. PFC in the past had taken state government guarantees on a part of its exposures to state power

utilities, and after adjusting for these, PFCs total unguaranteed exposure to weaker s tate power utilities accounts for

around 22% of its total portfolio as on March 2012.


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23

Table 10: State-wise outstanding credit portfolio and state government guarantees of PFC

State Portfolio as

on March

31, 2012

% of

total

portfolio

Of which

Govt.

guaranteed

Un guaranteed exposures as % of total portfolio

Generation Distribution Transmission Total

Rajasthan 12,729 10% 2066 8% 0% 0% 8%

Uttar Pradesh 9,134 7% 6261 0% 1% 0% 2%

Tamil Nadu 6,075 5% 556 4% 0% 0% 4%

Madhya Pradesh 7,067 5% 1954 3% 0% 0% 4%

Punjab 597 0% 347 0% 0% 0% 0%

Bihar 178 0% 0 0% 0% 0% 0%

Haryana 4,648 4% 66 3% 0% 0% 4%

Exposure to states

with weaker

power utilities

40,428 31% 11249 17% 2% 1% 22%

Maharashtra 12,167 9% 729 4% 2% 3% 9%

Andhra Pradesh 9,729 7% 510 6% 1% 0% 7%

Chattisgarh 6,563 5% 0 4% 1% 0% 5%

Others 12,592 10% 3030 6% 1% 0% 7%

Total State Utility 81,480 63% 15519 38% 6% 4% 51%

Source: Company

Amount in Rs. crore

As on March 2012 around 19% of total state power utility exposures (or 12% of total portfolio) of PFC were backed by

state government guarantees. Owing to fiscal consolidation by state governments over the past few years, the share of

PFCs state power utility exposures covered by guarantees has been progressively declining and going forward the

share of portfolio covered under the same likely to come down further. However in the past PFC has not relied on

enforcement of state government guarantees to recover dues and has been able to enforce regular collections by

insisting on default escrows on utility receivables and by taking a charge on the utilitys fixed assets.


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24

ANNEXURE 4 Projections

For The Year Ended 31.03.2012 31.03.2013 31.03.2014

Actuals Projections Projections

Total Interest Income 12,716 17,217 21,730

Total Other Income 140 214 246

Total Income 12,856 17,431 21,977

Total Interest Expended 8,480 11,465 14,759

Net Interest Income 4,236 5,752 6,972

Other Expenses:

Employee Expenses 72 86 104

Administrative Expenses 57 68 80

Total Other Expenditure 129 154 184

Total Expenditure 8,610 11,619 14,943

Operating Profits 4,246 5,812 7,034

Forex Losses 38 38

Provisions And Contingencies 143 242 113

PBT 4,104 5,533 6,884

Tax 1,073 1,446 1,799

PAT 3,032 4,087 5,123

Dividend 920 920 966

EPS 23 31 39

BV Per Share 157 181 211


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25

ASSETS 31.03.2012 31.03.2013 31.03.2014


TOTAL LOANS AND ADVANCES 1,30,072 1,67,793 2,09,741

TOTAL INVESTMENTS 59 77 77Cash in Hand 1,988 3,356 4,195

NET FIXED ASSETS 76 84 93

TOTAL OTHER ASSETS 3,379 4,359 5,449

TOTAL ASSETS 1,35,575 1,75,669 2,19,554

LIABILITIES 31.03.2012 31.03.2013 31.03.2014


Equity Share Capital 1320 1320 1320

NET WORTH (REPORTED) 20708 23874 27856

Interest subsidy fund from GoI 376 301 226

TOTAL Long Term BORROWINGS 106,055 141,440 179,625Total Short Term Borrowings 4071 5252 6565

TOTAL OTHER LIABILITIES 4365 4802 5282

TOTAL LIABILITIES 135,575 175,669 219,554


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26

KEY FINANCIAL RATIOS

Actuals Projected Projected

YEAR ENDED 31.03.2012 31.03.2013 31.03.2014

Yield on Average Advances 11.03% 11.54% 11.50%

Yield on Average Funds 10.86% 11.35% 11.28%

Cost of Average Funds 8.63% 8.90% 8.85%

Gross Interest Spread 2.24% 2.45% 2.43%

Interest Earned / Average Total Assets 10.59% 11.06% 11.00%

Interest Paid / Average Total Assets 7.06% 7.37% 7.47%

Net Interest Margin/ Average Total Assets 3.53% 3.70% 3.53%

Non Interest Income/ Average Total Assets 0.12% 0.14% 0.12%

Operating Expenses/Avg Total Assets 0.11% 0.10% 0.09%

Expenses(incl Provisions and Contingencies/Average Total

Assets 0.23% 0.25% 0.15%

Non Interest Income/Non Interest Expenses 107.93% 139.07% 134.26%

Operating Profit / Average Total Assets 3.54% 3.73% 3.56%

Forex losses/ Average Total Assets 0.02% 0.02%

Profit Before Tax(PBT)/ Average Total Assets 3.42% 3.58% 3.50%

Profit After Tax (PAT) / Average Total Assets 2.52% 2.63% 2.59%

Dividend / PAT 30.36% 22.52% 18.87%

PAT / Networth 16.89% 18.33% 19.80%

PAT-Dividend/ Average Total Assets 1.76% 2.03% 2.10%

CAPITALISATION RATIOSTotal Debt / Networth 5.32 6.14 6.68

Long Term Debt / Networth 5.32 6.14 6.68

Capital Adequacy Ratio 16.29% 15.98% 14.39%

Net NPAs/Networth 5.87% 5.98% 7.06%


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27

Annexure 5 : Key Coal based IPP exposures outstanding as on March 31, 2012

Name of the IPP Outstanding

as on Jun-11

Fuel Source mix (%) Power off-take (% of total Powe

capacity)

Domestic Import Captive Under

Case I

and Case

II12bidding

Under Captive

Sale, ROFR13

Sale and Sale

to SEBs withcost pass

through

Und

Merch

Sal

Udupi Power Corp, Karnataka 512 - 100% - 90% 10%

Lanco Power, Unit 1 & 2, Chattisgarh 448 100% - - 100% - -

Lanco Power, Unit 3, Chattisgarh 363 79% 21% - 35% 35%# 25%

Jhajjar Power, Haryana 327 100% - - 100% - -

Ind Bharat Energy, Orissa 325 83% 17% - 63% 12%^ 30%

Sasan Power, Singrauli 286 - - 100% 100% - 0%

East Coast Energy Pvt. Ltd, AP 227 60% 40% - 75% - 25%

RKM Powergen, 1080 MW , Chattisgarh 217 - - 100% 82% 18% -

Indiabulls Realtech, Maharashtra 163 83% 17% - 75% - 25%

RKM Powergen, 350 MW , Chattisgarh 155 100% - - 100%Indian metals and Ferro Alloys, Orissa 154 - - 100% - 60% -

Essar Power, MP 789 100% - - - 100%* -

India Bulls Power, Maharashtra 103 80% 20% - 75% - 25%

Thermal Powertech Corp, AP 103 93% 7% - 75% - 25%

KVK Nilanchal, Orissa 84 78% 22% - 50% 25%#

Sub Total 3579

Total Thermal IPP 4406

(Amount in Rs. Crore)

*PPA with Govt. Of MP is in place for 12.5% out of total ROFR for 37.5% (including 7.5% of the power to be supplied at

variable cost)

^ to be sold on variable cost

#includes 5% of the power capacity to be supplied at variable cost

12 In case of Case I bidding the entire onus of land acquisition, seeking water approvals, getting environment clearances and fuel

tie-up is on the project developer. In case of Case II bidding onus of land acquisition, seeking water approvals, and getting

environment clearances is on the power procurer and the fuel tie up is arranged either by the procurer or the bidder.

13 Right of First Refusal under the MOUs (on cost plus basis) with the respective state governments


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28

Annexure 6: Key Non Coal based IPP exposures outstanding as on March 31, 2012

Name of the IPP Category Amount outstanding

Suzlon Energy Limited Wind Based 954

Shri Maheshwar Hydel Power Project Hydro Based 700

Torrent Power Generation Gas Based 373

Konaseema Gas Power Gas Based 388

Vadinar Power Company Gas Based 870

R S India Wind Based 228

Dans Energy Hydro Based 220

Jal Power Corporation Limited Hydro Based 164

Sub Total 3895

Source: Company and ICRA Online Research

Amount in Rs. Crore


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29

Annexure 7: PFCs competitive positioning viz.a.viz. banks

PFC Banks

Funding Mix PFC is allowed to raise infrastructure bonds, tax free

bonds and can borrow upto 50% of net worth

through ECBs.

Does not have access to deposits

At an advantage with access to low cost

CASA14deposit funding.

CRR/SLR

norms Not Applicable

CRR15-4.75% of NDTL

SLR16-24% of NDTL

Negative carry on these investments does

off-set the impact of low cost CASA deposit

base to an extent

Priority Sector

lending targets

Not Applicable 40% of ANBC17, at a disadvantage as the

portfolio is lower yielding

Source : ICRA Online Research

14 Current Account Savings Account

15 Cash Reserve Ratio

16 Statutory Liquidity Ratio

17 Adjusted Net Bank Credit


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