POWER FINANCE CORPORATION LTD.

Financial Statement Analysis

Submitted By:

NOVEMBER 8, 2020
FINBOTS
 MBAZC 415
Financial and Management Accounting
EC1 Experiential Learning
Group No: 15
Group Name: FINBOTS
Instructor: Dr. Krishna M
Sl.No Group Members Name Roll No Email id

YUVARAJ J 2020MB53009 2020mb53009@wilp.bits-pilani.ac.in

1
(Submitted online)
2 SAMEER GOSWAMI 2020MB53001 2020mb53001@wilp.bits-pilani.ac.in

3 ASHWINI M N 2020MB53039 2020mb53039@wilp.bits-pilani.ac.in

4 SYED AQUIB R 2020MB53017 2020mb53017@wilp.bits-pilani.ac.in

5 KHAIRNAR RUTUJA PRAKASH 2020MB53068 2020mb53068@wilp.bits-pilani.ac.in

6 LITHIN THILAKAN 2020MB53029 2020mb53029@wilp.bits-pilani.ac.in

CHIKKALA SRIDHAR
7 2020MB53065 2020mb53065@wilp.bits-pilani.ac.in
SRINIVASAN

8 SUNITHA C S 2020MB53050 2020mb53050@wilp.bits-pilani.ac.in

9 SAURABH ASTHANA 2020MB53006 2020mb53006@wilp.bits-pilani.ac.in

10 SUNEETHA KATRAGADDA 2020MB53047 2020mb53047@wilp.bits-pilani.ac.in

Overview
This Report has been prepared in fulfillment of the requirement for the Experiential Learning (EC1) for the
subject: Financial and Management Accounting on the topic Financial Statement Analysis of POWER
FINANCE CORPORATION in MBA – FINTECH 1st Semester in the academic year 2020.
The report also contains a comparative analysis of both PFC and REC based on the key financial ratios
across profitability, liquidity, leverage and return to investors/market.

Highlights
The rationale behind doing Experiential Learning (EC1) and preparing the report is to study the Financial
Statement Analysis and interpretation of, what is the company, what is financial statement, why Analysis
of statement is necessary for a company, Ratio analysis and how we can use ratio analysis and other
financial metrics to interpret financial and business performances

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Table of Contents
EXECUTIVE SUMMARY ....................................................................................................................................... 3
1. INTRODUCTION ............................................................................................................................................. 4
A. History of PFC ................................................................................................................................................... 4
B. Key Milestones ................................................................................................................................................... 5
C. PFC’s Vision....................................................................................................................................................... 5
D. PFC’s Mission .................................................................................................................................................... 5
E. Organization’s structure ................................................................................................................................... 6
F. Products and services offered ........................................................................................................................... 7
G. Operational Model ............................................................................................................................................. 8
H. Major Competitors .......................................................................................................................................... 10
2. RESEARCH METHODOLOGY ................................................................................................................... 11
A. Financial Ratios Analysis: ............................................................................................................................... 11
B. Selection of Competitors: ................................................................................................................................ 11
C. Source of Data:................................................................................................................................................. 11
3. FINANCIAL PERFORMANCE .................................................................................................................... 12
A. Trend analysis of performance in last three years of Key metrics .............................................................. 12
B. Comparative analysis of performance with competitors ............................................................................. 14
4. SWOT ANALYSIS OF PFC LTD.................................................................................................................. 18
A. Strengths ........................................................................................................................................................... 18
B. Weaknesses ....................................................................................................................................................... 19
C. Opportunities ................................................................................................................................................... 19
D. Threats .............................................................................................................................................................. 19
5. CONCLUSION ................................................................................................................................................ 20
A. Comments on overall financial position of PFC vs REC Ltd ...................................................................... 20
B. Areas of good performance ............................................................................................................................. 20
C. Areas of concern .............................................................................................................................................. 21
D. Measures for improving financial ratios in future. ...................................................................................... 21
ANNEXURES........................................................................................................................................................... 22
E. Standalone Balance Sheet and Income Statements of company (PFC) ...................................................... 22
F. Standalone Balance Sheet and Income Statements of Competitors (REC) ................................................ 24
REFERENCES......................................................................................................................................................... 26

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EXECUTIVE SUMMARY

Introduction -

Power Finance Corporation Ltd (PFC) was established on July 16th, 1987, it is a specialized financial
institution lending to the power sector. PFC comes under administrative control of Ministry of Power and
is classified as an infrastructure finance company. To drive sustained growth, PFC explores and taps latent
opportunities in financing fuel suppliers and equipment manufacturers, among others, as well as in the
renewable energy space. They operate through several other business units, such as power exchanges, to
strengthen their preparedness for addressing future challenges.

With a net worth of INR 451 Billion as of Sep, 2020, PFC stands as a backbone on Indian power sector.

Keys to Success

 PFC as a company strives to ensure that the benefits of economic development are shared by one
and all, and most importantly, the society.
 PFCs main advantage is they leverage the expertise in financing the power sector and prudently
deploying resources, they have evolved with the changing policy dynamics to emerge as a
dominant market leader.
 The acquisition of REC in 2019 was a significant milestone in their journey. It enables the Group
to better manage portfolio risk, improve efficiency in lending processes and help resolve stressed
assets. Further, they are deepening their penetration into funding renewable projects.

Financial Highlights

 In FY 20, PFC recorded an interest income of Rs 31,950 crores vs Rs 28,432 crores in FY19
(growth of 12%).
 The FY20’s annual yield (on earning assets) is at 10.63% Vs 10.62% of FY19.
 In FY20, the cost of funds has come down by close to 16 bps to 7.79% from 7.95% in FY19,
 The Capital Risk Adequacy ratio for FY20 is 16.96% Vs 17.09% in FY19.
 Net NPA Levels have come down to 3.8% from 4.6% in FY19, the lowest net NPA ratio in the
last three years.

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1. INTRODUCTION
Power Finance Corporation Ltd (PFC) was established on July 16th, 1987. PFC was also bestowed with
the title of a 'Navratna CPSE' in June, 2007. PFC is a specialized financial institution lending to the power
sector. PFC comes under administrative control of Ministry of Power and is classified as an infrastructure
finance company by RBI and PFC is also the “Nodal Agency” for the development of Integrated Power
Development Scheme (IPDS), Ultra Mega Power Projects (UMPPs), and a “bid process coordinator” for
Independent Transmission Projects (ITPs) and Integrated rating for different State Power Utilities on its
performance. It is speculated that PFC is going to play a key role in years to come as a large part of our
nation is still unfortunately without any access to electricity.

With a net worth of INR 383 Billion as of Sep, 2018, PFC stands as a backbone on Indian power sector.

Corporate Overview

To drive sustained growth, PFC explores and taps latent opportunities in financing fuel suppliers and
equipment manufacturers, among others, as well as in the renewable energy space. They have set up a
subsidiary – PFC Consulting Limited – and several other business units, such as power exchanges, to
strengthen their preparedness for addressing future challenges.

PFC Group Structure

A. History of PFC
PFC was established in 1986, under the companies act as a public limited company. The company was
incorporated as a financial institution to finance, facilitate and promote India’s power sector development.
It was notified as a public financial institution under section 4A of the companies act on Aug 31, 1990.

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 B. Key Milestones

C. PFC’s Vision
To be the leading institutional partner for the power and allied infrastructure sectors in India and overseas
across the value chain.

D. PFC’s Mission
PFC aims be the most preferred Financial Institution; providing affordable and competitive products and services
with efficient and internationally integrated sourcing and servicing, partnering the reforms in the Indian Power Sector
and enhancing value to its stakeholders; by promoting efficient investments in the power and allied sectors in India
and abroad.

“We will achieve this being a dynamic, flexible, forward looking, trustworthy, socially responsible organization,
sensitive to our stakeholders' interests, profitable and sustainable at all times, with transparency and integrity in
operations.” –PFC AR2020

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E. Organization’s structure

Sh. R. S. Dhillon
Chairman & Managing
Director

Smt. Parminder Sh. P. K. Singh*

Chopra Vacant *
Director Commercial &
Finance Division, Director Additional I/C Dir Project
Director Project Division Division

Sh. Ram Kishore

Sh. Yogesh Juneja Dr. Sunita Singh Sh. Manohar Balwani Sh. B. S. Bisht Sh. R. Murahari
Talluri
Corporate Planning &
PFC Consultng Ltd, Chief Risk Officer,
Vigilance, CVO Company Secretariat, Internal Audit, CMG Public Relations, ED
CEO CMG
CMG

The corporation is headed by the Chairman and Managing Director (CMD), Shri. Ravinder Singh Dhillon.
The company has three wings, each headed by a Functional Director namely, Commercial Division,
Projects Division and Finance & Financial Operations division. The Commercial Division looks after the
credit appraisal and categorization of borrower entities, power sector reforms, review and analysis. The
Projects Division controls the operation in various states and project appraisal. Finance s Division looks
after the Fund Mobilization and Disbursement. PFC is a lean organization. The approximate number of
employees is around 500. Per employee profit around Rs.12 Cr

The Board functions through various committees constituted to oversee specific operational areas. The
Board of Directors and its committees meet at regular intervals. The Board has constituted the following
committees:

(i) Committee of Functional Directors: Committee of Functional Directors has power to sanction financial
assistance up to Rs.100 Crore to individual schemes or projects including enhancement of financial and
lease assistance and relaxation of eligibility conditions, subject to overall ceiling of Rs. 4,000 crores in a
financial year.

(ii) Loans Committee of Directors: Loans Committee of the Directors has been constituted for sanction of
financial assistance up to Rs.500 Crore to individual schemes or projects including enhancement of
financial assistance and relaxation of eligibility conditions, subject to overall ceiling of Rs. 10,000 Crore
in a financial year.

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F. Products and services offered
PFC provides three types of services:

1. Financial Services: These services include Term loan to power utilities, Lease financing, Direct
Discounting of Bills, Guarantee Services, Loan Syndication, and Short-term loan.

2. Institutional Development Services: It provides support to power utilities to improve their technical,
financial and managerial skills for which utilities may engage consultants, hold workshops, work out utility
development plans and carry out various reform &restructuring related studies.

3. Other Services: PFC also provides fee-based consultancy services to state owned utilities, state
regulatory commissions, state governments, etc. PFC provides a wide range of services including Fund
based financial products and various services from conceptualization of project to the post - commissioning
services to its clients in the power sector.

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G. Operational Model
Borrowings

The major parts of PFC's funds

are raised through Rupee-
denominated bonds. PFC bonds
enjoy the highest credit rating in
the Indian market and in
international markets; they are
rated at par with the Indian
Sovereign rating. It also borrows
short term and long term from
various banks and other
financial institutions. It has also
raised external commercial
borrowings (ECB) through
private placement in US market.
PFC is one of the institutions
eligible for raising funds
through capital gain tax bonds
under section 54EC of
the Income Tax Act, 1961.
Over the last two-three years
PFC has focused on diversifying
its borrowing portfolio by
raising funds from international
markets. In November 2017,
PFC launched its main Green
Bond issue for US$400 million,
which witnessed the tightest ever spread for any Indian Issuer for its maiden 10-year issue. In the first
quarter of financial year 2020, PFC has raised about US$1.3 billion from the international markets. Out of
this US$1 billion was raised in June 2019, which was the first dual and largest USD bonds transaction for
Govt owned Indian NBFC. This was also PFC's first borrowing from the international markets after the
successful acquisition of REC Limited.
In 2017, PFC was granted approval by Ministry of Finance, Govt. of India, to raise funds under section
54EC of the Income Tax Act 1961. PFC was the first company to obtain such an approval post the budget
announcement in February 2017. PFC has raised more than Rs.1000 Cr under these bonds since their launch
in 2017.

Credit rating

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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.

Ministry of Power, Government of India appointed PFC as a nodal agency for the implementation of the
ambitious program’s as follows,
● Integrated Power Development Scheme(IPDS)
● Ultra Mega Power Plants (UMPPs)
● Independent Transmission Projects(ITB)
● Integrated rating for different State Power Utilities on its performance
Overall PFC acts like a banker to Power Companies for India’s infrastructure growth.

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H. Major Competitors
PFC being the largest financial company in the Power Sector in India, only one competitor existed
i.e., Rural Electrification Company (REC) till Mar 2019. In the month of Dec 2018, The Union Cabinet
‘In Principle’ approves strategic sale of the Government of India’s existing 52.63% of total paid up equity
shareholding in Rural Electrification Corporation to Power Finance Corporation along with transfer of
management control

The Cabinet Committee on Economic Affairs, chaired by the Prime Minister Shri Narendra Modi has given
its ‘In Principle ‘approval for strategic sale of the Government of India’s existing 52.63% of total paid up
equity shareholding in Rural Electrification Corporation (REC) to Power Finance Corporation (PFC)
along with transfer of management control.

The acquisition intends 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. It may also allow for cheaper fund raising with increase in
bargaining power for the combined entity. Both REC and PFC are Central Public Sector Enterprises under
the Ministry of Power.

Accordingly, on 28th March 2019, PFC has acquired 103.94 Crore shares constituting 52.63% equity
stake held by the government in REC along with the management control at a cash purchase
consideration of Rs 14,500 Crore. The acquisition price of REC per equity share worked out to Rs 139.50
per piece

REC came into being in 1969 to articulate a response to the pressing exigencies of the nation. During the
time of severe drought, the leaders sought to reduce the dependency of agriculture on monsoons by
energizing agricultural pump-sets for optimized irrigation. Thereafter, REC ventured into newer paths and
expanded its horizons to emerge as a leader in providing financial assistance to the power sector in all
segments, be it Generation, Transmission or Distribution.

REC is a Navratna company under the Ministry of Power. It funds its business with market borrowings of
various maturities, including bonds and term loans apart from foreign borrowings, on its own.
Domestically, it holds the highest credit ratings from CRISIL, ICRA, IRRPL and CARE and internationally
it is rated at par with the sovereign ratings. Under the discerning leadership of highly qualified and
experienced professionals, which has effectively harnessed the individual talents of its employees, REC
has maintained consistent profit margins and paid dividends each year since fiscal 1998. It has thus
propelled itself to a net worth of over Rs.37, 000 crore. REC’s humble beginnings spearheaded it into the
corporate world and to this day its commitment towards nation-building constitutes its core value. As a
natural corollary, REC has also been entrusted with the responsibility of being the coordinating agency for
rolling out UDAY (Ujwal Discom Assurance Yojana) which seeks to operationally reform and financially
turnaround the power distribution companies of the country. Its two subsidiaries – RECPDCL (REC Power
Distribution Company Limited) and RECTPCL (REC Transmission Project Company Limited) work in
tandem with REC to realize their shared mission by providing consultancy services in Distribution and
Transmission sectors, though REC was taken over by PFC during March 2019, there is no true competitor
for PFC. However, for the limited purpose of our analysis and reporting, REC has been considered as the
competitor

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2. RESEARCH METHODOLOGY
The research involved extensive and intensive studies of Power Finance Corporation. A sincere effort has
been made to study the financial statements of the company and perform relevant analysis. During this
project, we analyzed the financial position and performance of the company across three years. Based on
our research and understanding, we have provided the interpretation and conclusion of the financial
position of Power Finance Corporation.

A. Financial Ratios Analysis:

Financial ratios are extracted from the values in the financial statements to gain meaningful information on
PFC. The values from a company’s financial statements – balance sheet, income statement, and cash flow
statement – are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth,
margins, profitability, rates of return, valuation etc.

From PFC’s point of view, the following key financial ratios (3 from each category) are being further
analyzed.

Profitability Liquidity Leverage Return to Investors

Gross Operating Earnings Per

Current ratio Debt Equity
Margin Share

Net Profit Margin Quick ratio Interest Coverage Dividend Yield

Return On Equity
Cash Ratio Debt Ratio P/E
(ROE)

B. Selection of Competitors:
PFC being a financing institution that has been providing financial assistance to power projects across India
including generation, transmission, distribution and RM&U projects and given the uniqueness of the
funding, the only competitor for PFC was REC. Since REC was taken over by PFC during March 2019,
there is no true competitor for PFC. However, for the limited purpose of our analysis and reporting, REC
has been considered as the competitor and the stand-alone Financial statements of the both these companies
have been analyzed.

C. Source of Data:
•Annual reports from the PFC & REC Company’s website
•Secondary information, like Trading and stock price information taken from Money control & Yahoo

Due to adoption of GAAP from 2017, various regroupings have been done to comply with the standards and to
make data comparable, we have analyzed the financial statements and performed the ratio analysis from 2017-18
to 2019-20 (for 3 years). The same has been discussed and agreed with by Prof Krishna

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3. FINANCIAL PERFORMANCE

A. Trend analysis of performance in last three years of Key metrics

Total Revenue & YoY Growth

40,000 20.0%
16.0%
10.7% 15.0%
30,000
Rs Crores

10.0%
20,000
33,371 25,980
5.0%
28,766
10,000
0.0%
-3.8%
0 -5.0%
YE MAR20 YE MAR19 YE MAR18

Revenue YoY growth

Cost Of Funds (in Basis points (BPS))

8.21

7.95

7.79

FY 20 FY 19 FY 18

Net NPA %
7.4%

4.6%
3.8%

FY 20 FY 19 FY 18

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 Capital Adequacy Ratio
20.0%

17.0% 17.1%

FY 20 FY 19 FY 18

Profit After Tax (₹ in Crore)

6953

5655

4387

FY 20 FY 19 FY 18

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B. Comparative analysis of performance with competitors

PROFITABILITY RATIOS

GROSS OPERATING MARGIN Gross Operating margin of a financial

institution is computed by

(Total Revenue -Total interest & finance

costs) Total Revenue
38% 41%
34% 36% 34% 35%
Using the above definition Gross Operating
Margin of PFC is at 34% Vs 36% of REC’s

YE MAR20 YE MAR19 YE MAR18

PFC REC

NET PROFIT MARGIN The Net profit Margin is the Net income
generated by an enterprise. For PFC, Net
Profit margin shows the actual business
23% 23%
20%
profitability after the impact of financing costs
16% 16% that is a major cost component of any
15%
financing business. The Net profit margin has
reduced to 16% from 23% in 2019 due to
higher interest costs incurred on term loans
and is closely following competition.
YE MAR20 YE MAR19 YE MAR18

PFC REC

RETURN ON EQUITY The Return on Equity shows the Return

earned by the Shareholders

17% The ROE is at 12% in 2020 Vs 16% in 2019,

16%
14%
12% 12%
11%

YE MAR20 YE MAR19 YE MAR18

PFC REC

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 LIQUIDITY RATIO

CURRENT RATIO Current Ratio establishes the Short-term debt

paying ability.

Current assets less current liabilities =

“working capital,” the relatively liquid portion
of an enterprise that serves as a safeguard for
1.1 1.1 1.1 1.1 1.1 1.1 meeting unexpected obligations arising within
the ordinary operating cycle of the business.

Current Ratio of 1 is considered healthy,

YE MAR20 YE MAR19 YE MAR18

PFC REC

QUICK RATIO Quick of the Acid Test Ratio establishes the

immediate short term liquidity.

0.1 0.1 0.1

0.1 0.0
0.0

YE MAR20 YE MAR19 YE MAR18

PFC REC

CASH RATIO A more conservative view of the Quick ratio,

Cash Ratio establishes how much of Cash is
available to pay off the liabilities.

A Ratio of 0 suggests that the cash balance

doesn’t suffice to pay off the liabilities,
0.1 however in the case of PFC, the cash balances
0.1 are effectively managed to ensure that the
0.0 0.0 0.0 0.0
cash balances are kept at bare minimum and
YE MAR20 YE MAR19 YE MAR18 funding to the bank account is based on the
actual loans due dates and maturity
PFC REC

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 LEVERAGE RATIOS

DEBT EQUITY RATIO The debt-to-equity ratio is a financial ratio

indicating the relative proportion of
shareholders' equity and debt used to finance a
8.9
7.7 company's assets.
7.0 7.0 6.6 6.5
A high Debt Equity ratio means high risk.
Optimal Debt Equity Ratio is 1.5 for banking
industry and anything more is considered
unfavorable. In this case PFC’s 7 while
YE MAR20 YE MAR19 YE MAR18 competition is at 8.9

PFC REC

INTEREST COVERAGE Times interest earned or interest coverage

ratio is a measure of a company's ability to
honor its debt payments.
2.2 2.2 2.1 2.2 2.2
2.0
Interest coverage of 2 indicates company in
good financial and has the ability to cover its
debt payments, Interest coverage of 1is very
risky. The higher the ratio, the more poised it
is to pay its debts PFC’s 2.2 denotes that the
YE MAR20 YE MAR19 YE MAR18 company is comfortably placed to meet its
interest obligations
PFC REC

DEBT RATIO The debt ratio is a financial ratio that

measures the extent of a company’s leverage.
It can be interpreted as the proportion of a
company’s assets that are financed by debt.

A high ratio means that a company is putting

0.6 0.6 0.7 0.7
0.6 0.6 itself at a risk of default and a ratio below 1
translates to the fact that a greater portion of a
company's assets is funded by equity.
YE MAR20 YE MAR19 YE MAR18
PFC and REC’s debt ratio is at 0.6
PFC REC

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 INVESTOR RATIO

EARNINGS PER SHARE Earnings per share (EPS) is a company's net

profit divided by the number of outstanding
equity shares.

29.2 EPS indicates how much money a company

24.7 26.3
21.4 22.4 makes for each share of its stock, and is a
16.6
widely used metric to estimate corporate
value. A higher EPS indicates greater value
because investors will pay more for a
YE MAR20 YE MAR19 YE MAR18 company's shares if they think the company
has higher profits relative to its share price.
PFC REC

DIVIDEND YIELD The dividend yield is a financial ratio

(dividend/price) that shows how much a
company pays out in dividends each year
relative to its stock price.
12.4%
10.3% It's pertinent to know that higher dividend
9.1%
7.2% 7.3%
yields do not always mean good news, the
dividend yield of a stock may be elevated as
0.0%
the result of a declining stock price.
YE MAR20 YE MAR19 YE MAR18
PFC Dividend Yield of 10.3% is lower than
PFC REC that of REC’s

PRICE EARNINGS RATIO The price-to-earnings ratio (P/E ratio) is the

ratio for valuing a company that measures its
current share price relative to its per-share
earnings (EPS).

A high P/E ratio could mean that a company's

5.2 5.2 5.6 stock is over-valued, or that investors are
4.3 3.6 4.7
expecting high growth rates in the future.

YE MAR20 YE MAR19 YE MAR18

PFC REC

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4. SWOT ANALYSIS OF PFC LTD

•Rising Net Cash Flow and Cash
from Operating activity
•Increasing Revenue every Quarter
for the past 4 Quarters
•Book Value per share Improving
for last 2 years
•Growth in Net Profit with
increasing Profit Margin (QoQ)
•Company able to generate Net
Cash - Improving Net Cash Flow
for last 2 years
•Company with Zero Promoter
Pledge
• Red Flag: High Interest
Payments Compared to
Earnings
• Companies with High Debt
• Low Piotroski Score :
Companies with weak
financials
• MFs decreased their
shareholding last quarter
• Companies with Increasing
STRENGTHS WEAKNESSES Debt

THREATS OPPORTUNITIES

•Economic Slowdown in economic •Companies with current TTM PE

growth in India Ratio less than 3 Year, 5 Year and
•Financial health of state DISCOMs 10 Year PE
(Power Departments) •Stock with Low PE (PE < = 10)
•Decrease in Provision in recent
results
•RSI indicating price strength

A. Strengths
 Rising Net Cash Flow and Cash from Operating activity

 Increasing Revenue every Quarter for the past 4 Quarters

 Book Value per share improving for last 2 years
 Growth in Net Profit with increasing Profit Margin (QoQ)
 Company able to generate Net Cash - Improving Net Cash Flow for last 2 years
 Company with Zero Promoter Pledge
 Promoter Pledging refers to a situation where the promoter pledges some or all of his shares
with the lenders to obtain loans.

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B. Weaknesses
 High Interest Payments Compared to Earnings
 This identifies stocks which have low interest coverage, with interest payments that are high
compared to their earnings. This indicates that these companies may have trouble meeting
their interest payments. Stocks with an interest coverage ratio of 1.5 or below are considered
in the danger zone.
 Companies with High Debt

 Low Piotroski Score : Companies with weak financials

 9 being the best and 0 being the worst. PFC scores a 3 on Piotroski Score.

 MFs decreased their shareholding last quarter

 MFs decreasing their shareholding in a stock is considered negative for the stock.
 Companies with Increasing Debt

C. Opportunities
 Companies with current TTM PE Ratio less than 3 Year, 5 Year and 10 Year PE
 Stock with Low Price to earnings (PE < = 10)
 Decrease in Provision in recent results
 RSI indicating price strength

D. Threats
 Economic Slowdown in economic growth in India
 Financial health of state's DISCOMs

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5. CONCLUSION

A. Comments on overall financial position of PFC vs REC Ltd

The performances of PFC and REC were compared using financial ratios across the categories of
Profitability, Liquidity, Leverage/Debt and Return to Investors/Market as described in Section 2A (Pg.
11).

Considering that they are both government-controlled, Non-banking financial corporations (NBFC)
and public companies operating in a volatile market, their performances are comparable and along
expected lines.

As with any company, there are areas of good performances and areas of improvements for PFC as
detailed below:

B. Areas of good performance

− While the operating margin of PFC has been slightly lower than that of REC, the net profit
margins have been consistently higher in comparison, indicating a better control on the expenses
towards interests and debts along with other outflows.
− Additionally, while the liquidity ratios of PFC indicate a troublesome position with respect to its
ability to pay off its short-term debts, a stable interest coverage ratio between 2.0 and 2.2
indicates that PFC is managing to pay off its interest expenses nevertheless. If it goes below 1.0,
then it is a warning bell for the investors.
− EPS, which indicates the net income that is earned for one common stock has been fluctuating for
PFC in the last three years; however, the rate of fluctuation is much lower as compared to the
industry average.
− Industry average for dividends yield is about 4.9. However, PFC has had a consistently higher
dividends yield of 9% or higher, indicating a higher level of maturity in comparison with other
NBFCs.
− Third largest profit making PSU on consolidated basis
− Average profit of >Rs.5000 Cr for consistent performance over last 5 years.
− Acquisition of REC
− On the borrowing front, the share of foreign currency borrowings in the overall borrowing
increased to 10% on the back of fresh foreign currency mobilization of USD 1.5 billion during the
FY 2018-19.
− Due to various efforts made by PFC on the borrowing front, the cost of funds has reduced
significantly from 8.21% in FY 2017-18 to 7.95% in FY 2018-19.
− PFC gets Government approval for issue of 54 EC Bonds – Capital Gain Tax free Bonds in FY
17-18.

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C. Areas of concern
− Return on Equity indicates how good a company is utilizing its shareholder equity to generate
returns. While RoE above 20 is considered to be good for this industry, PFC’s RoE has peaked to
a 16% in FY’19, and decreased to a 12% in 2020.
− Liquidity ratios are not very healthy. For example, the current ratio is consistently around 1.13
while the norm for a healthy ratio is 1.5 to 3.0 and indicates a positive short-term financial
strength. Likewise, the cash ratio has always been below 0.1 (and as low as 0.05 in FY20). But,
considering that PFC is a government entity, these numbers may not be alarming. However, in the
case of PFC, the cash balances are effectively managed to ensure that the cash balances are kept at
bare minimum and funding to the bank account is based on the actual loans due dates and
maturity
− The debt ratio of PFC has always been above 60%, indicating that 60% of its assets are funded by
the debts and only 40% or less by equity. It is a “leveraged” company. This indicates a risk as
PFC will have to pay up the interest on debts, irrespective of the operating results. This is also
evidenced by the high debt-equity ratio.
− In 2018, the average debt-equity ratio for NBFCs was about 5.4. However, in continuation of the
above debt ratio inference, the debt-equity ratio for PFC has been consistent at 6 or higher.

D. Measures for improving financial ratios in future.

− Improve Operating Margin: While PFC’s revenue has been increasing steadily, its operating
margin has not kept pace. PFC should focus on reducing operational costs by digitizing its
operations and adopting mobility for fraud reduction, optimal sales, and increased collections
through targeted reminders and reduced customer support costs. This will also help improve the
RoE as indicated in the next point.
− Even with a higher debt funding, the RoE is about 12%. Hence, the focus should be on increasing
the profit margins by reducing overhead expenses, administration costs and streamlining
operations. Improvements in asset turnover can also be a focus
− PFC to increase equity and reduce debt because interest will need to be paid even if there are
losses, but it is not mandatory to disburse dividends to the equity holders. This will lead to
improvement in RoE and Debt-equity ratios.
− PFC to keep a watch on dividends yield. To attract investors and maintain brand value of the
company.

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ANNEXURES

E. Standalone Balance Sheet and Income Statements of company (PFC)

Balance Sheet of PFC

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 Income Statement of PFC

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 F. Standalone Balance Sheet and Income Statements of Competitors (REC)
Balance Sheet of REC

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 Income Statement of REC

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REFERENCES

 https://pib.gov.in/Pressreleaseshare.aspx?PRID=1554934

 https://energy.economictimes.indiatimes.com/news/power/pfc-signs-pact-to-acquire-52-6-
govts-stake-in-rec-for-rs-14500-crore/68523430

 https://economictimes.indiatimes.com/industry/banking/finance/pfc-completes-rec-
acquisition-hopeful-of-merger-in-2019-20/articleshow/68617026.cms?from=mdr

 https://en.wikipedia.org/wiki/Power_Finance_Corporation

 https://economictimes.indiatimes.com/markets/stocks/news/outlook-2019-men-will-get-
separated-from-the-boys-in-nbfc-space-and-grow-
stronger/articleshow/67268644.cms?from=mdr#:~:text=Banks%20require%20lesser%20ca
pital%20adequacy,has%20faced%20solvency%20risk%20yet\

 https://www.recindia.nic.in/

 https://www.pfcindia.com/DocumentRepository/ckfinder/files/Investors/Annual_Reports/PF
C_AR2020_Book_29092020.pdf

 https://simplywall.st/stocks/in/diversified-financials/nse-pfc/power-finance-
shares?utm_medium=finance_user&utm_campaign=integrated-
pitch&utm_source=post&blueprint=1161409#dividend

 https://www.uniphore.com/how-indian-nbfcs-are-using-mobility-to-lower-operational-costs-
and-increase-revenues/

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