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Monday, May 9, 2011

Power Finance Corporation(PFC) FPO- worth applying

PFC is again hitting the capital market with its FPO (Follow-on Public Offer) of 22, 95, 53,340 equity shares (Face value 10) which comprises ‘offer for sell’ of 5, 73, 88,335 shares from the  Indian government, rest is fresh issue by the company.
The issue would constitute 17.39 % of the post issue paid up equity capital.
The price band is Rs. 193 on the lower end and on upper end it is Rs. 203.
At the upper price band issue shall fetch about Rs. 5300 crores. Retail investors shall get 5 percent discount to the price discovered in the book built issue.
PFC is a power sector lending company which has been awarded the status of IFC (Infrastructure financing company) by the government.
In 2007, PFC was conferred the Navratna status, a coveted status being awarded to highly efficient s PSUs.
PFCs loan assets increased with a CAGR   of 22 percent in past 5 years and its NPA is as low as .01% (FY 2011 Q3) of total loan assets.
FY 2011 Q3 figure of CAR (capital adequacy ratio) was 17.3%, which seems quite robust.
PFC has done investment (through joint ventures  with leading names like PGCIL,NTPC,NHPC etc) in power trading companies like PTC India, NPEL(national power exchange limited),PEIL(power exchange India limited) etc.
The company offers both fund-based (Indian currency loan, foreign currency loans) and non fund based (payment guarantee, letter of comfort)  financial products in the power sector.
CRISIL and ICRA have given AAA & LAAA ratings respectively,for its long term borrowing, which fortifies PFCs business model credibility.
REC, IDFC, IIFCL & IFCI are amongst its main competitors.
Post issue PFC shall be trading at price multiple of around 10(upper band 203, EPS annualized), a tad bellow industry level. Price Earning to Growth ratio is well within comfort level around .5.
Price to book which is around 2 is supposed to reduce after Q4 results.
RONW for FY2011 was around 19 %( till Q3 FY 11).
Valuations are at par with REC but much cheaper than IDFC.
Power shortage is not uncommon in India and with burgeoning population and industrial development, power demand shall grow day by day.
Government shall have no option but to go for power reforms to boost the power sector and that means more business to financing companies.
But everything is not that green, increasing competition from its peers, high interest rate scenario, pace of economic growth etc are the factors which shall determine the growth in power financing sector.
Still valuations are satisfactory and the 5% discount to retail investors makes it lucrative.
This issue might give 7-8% of profit on the listing day to retail investors, with caveat that overall market doesn’t go in tailspin.
For long term investors, it is good time and entry point to start accumulating the stock.

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