Equity Research INDIA

May 30, 2023

BSE Sensex: 62846
Power Finance Corporation BUY
ICICI Securities Limited Maintained
is the author and
distributor of this report Strong loanbook growth and healthy sanction
pipeline ahead; 30% dividend payout for FY23 Rs174
Q4FY23 result review,
earnings and TP Power Finance Corporation’s (PFC) Q4FY23 PAT was healthy at Rs34.9bn, up 16%
revision QoQ and 34% YoY, largely driven by credit cost reversal of Rs4.9bn. CRAR
sustained above 24% and PFC announced final dividend of Rs4.5/share, taking
Financials the total dividend for FY23 to Rs13.25, which translates into ~30% dividend
payout ratio.
Target price: Rs209 Loanbook finally picked pace with 7.4% QoQ and 13.2% YoY growth to Rs4.22trn.
Earnings revision Moreover, sanction pipeline is healthy at Rs2.31trn, which is >50% of current
(%) FY24E FY25E
loanbook. For FY23, margins have been moderate due to decline in yields and
PAT ↑ 16 NA rise in cost of funds. As a result, NII was lower by 3% QoQ, but up 3% YoY. Asset
quality improved with 6-year low GNPA and NNPA at 3.91% and 1.07%
Target price revision respectively.
Rs209 from Rs191
Overall, given the pick-up in loan growth, coupled with improving asset quality
metrics and likely sustenance of (or gradual uptick in) margins hereon, we
Shareholding pattern maintain our BUY rating on the stock with a revised target price of Rs209 at 0.8x
Sep Dec Mar
‘22 ‘22 ‘23 FY24E P/B (unchanged).
Promoters 56.0 56.0 56.0
Institutional  CRAR sustained above 24%; announced final dividend of Rs4.5/share
investors 34.1 34.8 35.1
MFs and other 11.5 11.6 12.2 (Rs13.25/share in FY23): PFC has been focusing on building an adequate capital
Banks/FIs 0.2 0.2 0.1 buffer. CRAR was steady at 24.37% vs 23.48% YoY. It announced final dividend of
Insurance 5.6 6.1 6.3
FIIs 16.8 16.9 16.5 Rs4.5/share (cumulative Rs13.25/share in FY23), which is equal to ~30% payout on
Others 9.9 9.2 8.9
Source: BSE
FY23 EPS. We believe PFC will continue with its policy of declaring dividend
equivalent to 30% of earnings, or 5% of net worth, whichever is higher.

ESG disclosure score  Loanbook finally picks pace with 7.4% QoQ uptick: Drawing down from the
Year 2020 2021 Chg robust sanctions pipeline, disbursements gained traction with 133% YoY and 54%
ESG score NA NA NA QoQ growth in Q4FY23. The higher growth came largely on the back of distribution-
Environment NA NA NA
Social NA NA NA related projects, which comprised 47% of incremental quarterly disbursements. As a
Governance NA NA NA
Note - Score ranges from 0 - 100 with
result, loanbook was up 7.4% QoQ / 13.2% YoY at Rs4.23trn.
a higher score indicating higher ESG
disclosures. PFC group can now lend to infrastructure and logistics sector up to 30% of PFC’s
Source: Bloomberg, I-sec research outstanding loanbook, subject to the condition that for every financial year, two-
thirds of the new sanctions should be for power and green energy projects only.
PFC has sanctioned Rs166.5bn and disbursed Rs10bn of loans towards infra (ports,
irrigation and fibre net). Hence, as disbursements pick up going forward, we
envisage loan asset growth gradually gathering pace.
Market Cap Rs460bn/US$5.6bn Year to March FY22 FY23P FY24E FY25E
Reuters/Bloomberg PWFC.BO/POWF IN NII 131,243 123,875 158,252 184,714
Shares Outstanding (mn) 2,640.1 Net profit 100,219 116,055 132,898 153,614
52-week Range (Rs) 174/98 Diluted EPS (Rs) 38.0 44.0 50.3 58.2
Free Float (%) 44.0 BV (Rs) 219 253 287 327
FII (%) 16.5 Adj. BV (Rs) 201 240 275 315
Research Analysts: Daily Volume (US$'000) 16,495 Price/book (x) 0.8 0.7 0.6 0.5

Chintan Shah Absolute Return 3m (%) 19.9 Price/ Adj book (x) 0.9 0.7 0.6 0.6
chintan.shah@icicisecurities.com Absolute Return 12m (%) 72.7 Diluted P/E (x) 4.6 3.9 3.4 3.0
+91 22 6807 7658
Sensex Return 3m (%) 6.9 Dividend yield (%) 6.9 7.6 8.7 10.1
Renish Bhuva
renish.bhuva@icicisecurities.com Sensex Return 12m (%) 15.9 RoE (%) 19.9 18.6 18.7 19.0
+91 22 6807 7465
Please refer to important disclosures at the end of this report
Engineers India, May 30, 2023 ICICI Securities
 Coverage ratio healthy at 72.7%: Coverage ratio on stage-3 assets has
improved to 72.7% (71.8% QoQ and 68.6% YoY). It now carries provision of
77% on stressed projects being resolved under the NCLT and 51% on other
stressed projects. Given that the company has already made >70% provision
towards stage-3 assets and recoveries are not leading to any incremental
provisioning, we are looking at provision write-backs for FY24E.
Currently, 22 stressed projects of Rs165bn are in stage-3, of which 13 projects
totaling Rs139bn are being resolved under NCLT and the remaining 9 projects
totaling Rs26bn are being resolved outside NCLT. Furthermore, 2 projects are in
advanced stages of resolution. Incremental resolutions are likely to keep the
stress pool under check.
 Yield expansion moderates, while rise in funding cost pulls down margins:
For FY23, Margins have been moderate due to decline in yields and rise in cost
of funds. Margins for Q4FY23 moderated by 6bps QoQ to 3.39%. As a result,
NII was lower by 3% QoQ, but up 3% YoY. For FY23, yield on earnings assets
fell 18bps YoY to 10.04%, while cost of funds was up 21bps YoY to 7.51%. As a
result, interest spread on earning assets was down 39bps YoY while NIM on
earning assets was down 26bps YoY.
Company had seen a reduction in yields to the extent of 165-300bps from
Sep’20 to Dec’22, while yields increased in Dec’22 (in the range of 10-50bps)
and Mar’23 (25bps across the board, except 10bps for renewables). This should
help the company maintain margins at current levels or even see slight uptick.
 Hedging proportion was improved to minimise the impact of INR
depreciation: PFC booked forex translation loss of Rs2.9bn (Rs2.6bn QoQ and
Rs5.1bn YoY). As of Q4FY23, ~92% (77% QoQ) of forex borrowings with
residual maturity of up to 5 years have been hedged. On total foreign currency
portfolio, ~68% (55% YoY) portfolio have been hedged. Total outstanding
foreign currency borrowings portfolio stands at Rs645.5bn, which is ~18% of
outstanding borrowings.
 Key risks: 1) Higher haircut with delayed resolution may pose risk to our credit
cost estimates, and 2) slower than anticipated demand pick-up in project
financing and liquidity schemes may result in correspondingly slow loan growth.

2
Engineers India, May 30, 2023 ICICI Securities
Table 1: Profit and loss account
(Rs mn, year ending March 31)
Q4FY22 Q1FY23 Q2FY23 Q3FY23 Q4FY23 YoY QoQ
Interest income 89,380 89,290 95,334 95,662 96,167 7.6 0.5
Interest expenses 55,721 54,616 56,848 59,955 61,407 10.2 2.4
Net interest income 33,660 34,674 38,486 35,707 34,760 3.3 (2.7)
Other income 9,364 1,075 5,450 7,982 5,696 (39.2) (28.6)
Total income 43,023 35,750 43,937 43,689 40,455 (6.0) (7.4)
Operating costs 7,505 8,634 5,719 8,149 2,585 (65.6) (68.3)
PPOP 35,518 27,116 38,218 35,540 37,870 6.6 6.6
Provisions 3,518 1,717 1,518 -1,256 -4,942 (240.5) 293.6
PBT 32,001 25,399 36,700 36,796 42,812 33.8 16.4
Tax 5,906 4,304 6,712 6,746 7,889 33.6 16.9
Current 4,959 5,133 7,236 5,157 5,776 16.5 12.0
Deferred 948 -830 -524 1,589 2,113 122.9 33.0
PAT 26,095 21,095 29,988 30,049 34,923 33.8 16.2
Source: Company data, I-Sec research

Table 2: Balance sheet details

(Rs mn, year ending March 31)
Q4FY22 Q1FY23 Q2FY23 Q3FY23 Q4FY23 % YoY % QoQ
Networth 5,93,500 6,10,600 6,28,600 6,52,890 6,82,022 14.9 4.5
Borrowings 32,01,280 31,44,700 32,35,220 34,20,450 36,26,380 13.3 6.0
Loans 37,31,350 37,01,860 37,66,960 39,33,870 42,24,980 13.2 7.4
Disbursements 1,66,510 46,430 1,71,470 2,51,780 3,87,880 132.9 54.1
Source: Company data, I-Sec research

Table 3: Key ratios

(% year ending March 31)
Q4FY22 Q1FY23 Q2FY23 Q3FY23 Q4FY23 YoY bps QoQ bps
CAR (%) 23.5 24.3 24.3 24.4 24.4 89 (4)
Gross NPAs (Rs mn) (% chg) 2,09,150 2,09,150 1,79,100 1,65,640 1,65,020 (21.1) (0.4)
Less: Prov. (Rs mn) (% chg) 1,43,440 1,45,060 1,29,710 1,18,879 1,19,990 (16.3) 0.9
Net NPAs (Rs mn) (% chg) 65,710 64,090 49,390 46,761 45,030 (31.5) (3.7)
Gross NPA (%) 5.6 5.7 4.8 4.2 3.9 (170) (30)
Net NPA (%) 1.8 1.7 1.3 1.2 1.1 (69) (12)
Source: Company data, I-Sec research

Chart 1: GNPA and NNPA at 6-year low

10.0 Gross NPA (%) Net NPA (%)
9.0
9.6

9.1

8.0
8.3

8.1

7.0
7.5

7.2

6.0
6.1
5.9

5.7
(%)

5.7

5.7

5.0
5.7
5.6

4.8

4.0
4.7

4.3

4.2

3.9
3.8

3.0
3.6

3.4

3.1

2.0
2.3

2.1

2.0

2.0
1.9

1.8

1.7

1.3

1.2

1.1

1.0
-
Q1FY20

Q4FY20

Q1FY21

Q2FY21

Q3FY21

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q4FY23
Q2FY20

Q3FY20

Q4FY21

Q1FY22

Q2FY23

Q3FY23

Source: Company data, I-Sec research

3
Power Finance Corporation, May 30, 2023 ICICI Securities
Chart 2: Drawdown from sanctions pipeline supports traction in disbursements
Generation Transmission Distribution Other
0.2 0.2 0.1 0.0 0.1 0.8 2.6 0.3 3.2
4.0 7.1
100%
90%
25
80% 39 42
40 52
70% 61 66 9 47
78 65
60% 79 4 6
50% 17
40% 13 8
5
30% 5 63 3
56 52
20% 34 8 3 39 34 38
29 29
10% 18
13
0%
Q2FY21

Q3FY21

Q2FY22

Q3FY22

Q4FY22

Q1FY23

Q4FY23
Q4FY21

Q1FY22

Q2FY23

Q3FY23
Source: Company data, I-Sec research

Chart 3: Loanbook up 7.4% QoQ / 13.2% YoY to Rs4.22trn

Loan Book (Rs bn) - LHS Growth YoY (%) - RHS

4,500 4,225 16%

14% 3,934 13%
4,000 13% 3,708 3,700 3,717 3,716 3,731 3,702 3,767 14%
3,449
3,500 12%
2,789 3,147 10%
3,000
2,455 10%
2,500 7%
6% 8%
2,000
5% 6%
1,500
3% 2% 4%
1,000 1%
1% 2%
500 0% 0%
- 0%
FY 17

FY18

FY19

FY20

FY21

Q1FY22

Q2FY22

Q1FY23

Q2FY23

Q3FY23

Q4FY23
Q3FY22

Q4FY22

Source: Company data, I-Sec research

Chart 4: Asset mix diversification is taking place in a gradual manner

Generation Transmission Distribution Other
0.8 0.8 0.8 0.6 0.6 0.6 0.6 0.6 0.5 0.6 0.6 0.6 0.6 0.8 1.3
100%
90% 21 21 22 22 25 27 30 31 33 33 34
80% 34 35 37 38
8 8 9 8 8
70% 8 8 8 8 8
60% 8 8 8 7 7
50%
40%
70 70 69 69 67 64
30% 61 61 59 59 57 57 57 55 54
20%
10%
0%
Q3FY20

Q4FY20

Q2FY21

Q3FY21

Q4FY21

Q2FY22

Q3FY22

Q1FY23

Q2FY23

Q4FY23
Q2FY20

Q1FY21

Q1FY22

Q4FY22

Q3FY23

Source: Company data, I-Sec research

4
Engineers India, May 30, 2023 ICICI Securities
Chart 5: GNPA to decline further as resolutions are underway
Gross NPA (%) - LHS Net NPA (%) - LHS Coverage Ratio (%) - RHS
14% 12.5% 80%

12% 70%
9.6%
9.4% 60%
10%
8.1% 50%
8%
5.7% 5.7% 5.7% 6.1%
5.6% 5.7% 40%
6% 4.8%
4.2% 3.9% 30%
4%
20%
2% 10%
0% 0%
FY 17

FY18

FY19

FY20

FY21

Q1FY22

Q2FY22

Q4FY22

Q2FY23

Q4FY23
Q3FY22

Q1FY23

Q3FY23
Source: Company data, I-Sec research

Chart 6: RoE above 18% and RoA above 3%

RoA (%) RoE (%)

20.9%
25.0%

19.8%

19.4%

18.8%
17.7%
17.3%

17.1%

17.0%

16.5%
16.2%

20.0%

14.0%
12.8%
12.1%

15.0%

10.0%

3.4%
3.2%

3.1%
3.0%

2.8%
2.6%
2.5%
2.4%

2.3%

2.3%

2.3%
1.7%

1.6%

5.0%

0.0%
FY 17

FY18

FY19

FY20

FY21

Q1FY22

Q2FY22

Q3FY22

Q2FY23

Q3FY23

Q4FY23
Q4FY22

Q1FY23

Source: Company data, I-Sec research

5
Power Finance Corporation, May 30, 2023 ICICI Securities

Q4FY23 earnings conference call takeaways

Margins
 Q4FY23 margins at 3.39%
 Spreads for FY23 at 2.53% which are lower vs. FY22
 Spreads around 2.5% is sustainable and could also go up with rise in yields
 Majority of loan book is floating in nature
 ~70% borrowings are fixed in nature
 Cost of funds for FY23 saw 20bps rise to 7.51% vs. 7.30% for FY22. This is mainly
due to rise in market rates on account of RBI policy tightening.
 Company had seen a reduction in yields to the extent of 165-300bps from Sep’20
to Dec’22, while yields have been increased in Dec’22 (10-50bps) and Mar’23
(25bps across the board except 10bps for renewables)
 Competition and lower interest rate regime led to the decline in interest rates
 Hedging cost is accounted under interest expense
Loanbook profile
 Group book crossed Rs8trn, making it the largest group in power financing in the
country
 Substantial rise in disbursements in FY23 wherein it disbursed Rs857.6bn in
FY23
 Rs2.31trn sanction in pipeline and plan to disburse in next few years
 Anticipate loan book to be in double digit in FY24
 PFC has sanctioned Rs166.5bn and disbursed Rs10bn of loans towards infra
(ports, irrigation and fiber net)
 PFC would continue to tap renewable energy projects
 During Q4, PFC recently undertook one of the largest deal in renewable energy
space (JSW Energy loan of Rs61bn refinanced wherein it acquired Mytra group
assets)
 Govt has launched RDSS in 2021 and LPSS in 2022 (on distribution side, these 2
would be potential growth drivers)
 PFC and REC are the nodal agency for RDSS implementation
 REC has done a major sanction to Mumbai Metro for which PFC is not a
participant during the year

6
Engineers India, May 30, 2023 ICICI Securities
Asset quality
 Lower NNPA ratio in the past 6 years
 Currently, total 22 stressed assets in Stage-3 totalling to Rs165bn. Of this, 13 are
being resolved via NCLT.
 Successful resolution and upgradation of stage-3 has resulted in provision
reversal during FY23
 With improving healthy quality of discoms, asset quality of PFC should see
improvement
Borrowings
 Borrowing programme of Rs800bn approved for FY24 via domestic as well
as international markets and via bonds/CPs/debenture and other type
 Exchange risk hedge ratio at 68% from 55% a year ago
 100% of dollar risk hedged for USD loans with upto 5 years maturity
Miscellaneous
 Dividend recommended by PFC board would be approved in AGM, post which it
will be paid to shareholders
 Fee and commission income also includes a part of prepayment
commission. For FY23, prepayment was lower than FY22 levels, which led to
lower fee income.

Price chart
200

150
(Rs)

100

50

0
May-22

May-23
May-20

May-21
Feb-21

Feb-22

Feb-23
Aug-20

Aug-21

Nov-21

Aug-22

Nov-22
Nov-20

Source: Bloomberg

7
Power Finance Corporation, May 30, 2023 ICICI Securities

Financial summary (consolidated)

Table 4: Profit and Loss statement Table 6: Growth metrics
(Rs mn, year ending March 31) (%, year ending March 31)
FY22 FY23P FY24E FY25E FY22 FY23P FY24E FY25E
Interest income 367,012 376,453 445,701 502,028 Net interest income 13.8 (5.6) 27.8 16.7
Interest expended 235,769 252,578 287,449 317,314 Net revenues growth 12.8 (4.0) 23.6 15.3
Net interest income 131,243 123,875 158,252 184,714 Opex growth 26.8 (5.5) 39.3 11.6
Non-interest income 5,425 2,755 3,011 3,515 PPP growth 12.3 (4.0) 23.0 15.5
Income from operations 136,669 126,630 161,263 188,229 PAT growth 29.6 15.8 14.5 15.6
Other income 13,474 17,448 16,764 17,067 Source: Company data, I-Sec research
Net revenues 150,143 144,078 178,027 205,297
Operating expenses 5,645 5,334 7,432 8,297
Pre-provision profit 144,498 138,744 170,595 196,999 Table 7: Yields, cost and margins
Provisions 22,221 (2,962) (2,000) (2,500) (%, year ending March 31)
PBT 122,277 141,706 172,595 199,499 FY22 FY23P FY24E FY25E
Taxes 22,058 25,652 39,697 45,885 Yield on assets 9.8 9.4 9.9 10.1
PAT 100,219 116,055 132,898 153,614 Cost of funds 7.0 7.2 7.4 7.4
Basic EPS (INR) 38 44 50 58 Spread 2.7 2.1 2.5 2.7
Diluted EPS (INR) 38.0 44.0 50.3 58.2 Net interest margins 3.7 3.1 3.5 3.7
DPS (INR) 12.0 13.3 15.2 17.6 Source: Company data, I-Sec research
Dividend payout (%) 32 30 30 30
Source: Company data, I-Sec research
Table 8: RoE decomposition
Table 5: Balance sheet (%, Year ending March 31)
FY22 FY23P FY24E FY25E
(Rs mn, year ending March 31) Net interest income/assets 3.7 3.1 3.5 3.7
FY22 FY23P FY24E FY25E Non-interest income/assets 0.4 0.5 0.4 0.4
Share capital 26,401 26,401 26,401 26,401 Net revenues/Assets 4.1 3.6 4.0 4.1
Reserves and surplus 567,102 655,622 745,857 851,153 Operating expense/Assets 0.1 0.1 0.2 0.2
Shareholders' fund 593,503 682,022 772,258 877,553 Provisions/Assets 0.6 (0.1) (0.0) (0.1)
Total borrowings 3,274,336 3,703,678 4,074,046 4,481,450 Taxes/Assets 0.6 0.6 0.9 0.9
Sources of funds 3,867,839 4,385,700 4,846,303 5,359,004 Total costs/Assets 1.3 0.7 1.0 1.0
ROA 2.8 2.9 3.0 3.1
fixed assets 797 896 904 942 Equity/Assets 14.2 15.5 15.8 16.3
Non-current investments 160,843 173,041 181,693 190,778 ROAE 19.9 18.6 18.7 19.0
Loans & advances 3,587,910 4,104,990 4,531,788 5,003,627 Source: Company data, I-Sec research
Other assets 118,290 106,772 131,917 163,656
Uses of funds 3,867,839 4,385,700 4,846,303 5,359,004
Source: Company data, I-Sec research Table 9: Valuation metrics
(Year ending March 31)
FY22 FY23P FY24E FY25E
Diluted EPS (INR) 38.0 44.0 50.3 58.2
EPS growth (%) 22.5 15.8 14.5 15.6
Book value per share (INR) 219 253 287 327
Adjusted book value per share (INR) 200 240 275 315
Diluted P/E (x) 4.6 3.9 3.4 3.0
Price/ BV (x) 0.8 0.7 0.6 0.5
Price/ Adj. Earnings (x) 0.9 0.7 0.6 0.6
Price/ Adj. BV (x) 0.9 0.7 0.6 0.6
Dividend yield (%) 6.9 7.6 8.7 10.1
Source: Company data, I-Sec research

8
Power Finance Corporation, May 30, 2023 ICICI Securities
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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)
BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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Power Finance Corporation, May 30, 2023 ICICI Securities
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