Emkay Global
Power Finance Corp (Buy)
Target: ₹210
CMP: ₹121.40
We believe that with the rising share of PSU exposure and stringent underwriting practices, Power Finance Corporation's asset quality trend is likely to improve. Our account-by-account analysis of stressed assets indicates that the current provision coverage is adequate for previous years' NPAs. In our view, the government's Aatmanirbhar Bharat package for discoms should boost loan growth in the near term. Despite stringent underwriting standards, PFC witnessed volatile asset quality trends due to private sector exposure; NPA formation here was a result of regulatory changes, which affected all power sector lenders. As of Sep'20, the private sector accounted for 16 per cent (₹61,100 crore) of PFC's loan book, of which 43 per cent was already recognised as NPAs.
We remain comfortable with the rising share of Government/PSU sector (including state utilities) in PFC's loan book, since it potentially entails lower credit losses.
Our account-by-account analysis of the existing stressed asset pool suggests limited risk of additional credit costs. We expect the overall haircut on the existing stressed portfolio to be 48-50 per cent; therefore, the current provision coverage of 56 per cent is adequate. With gradual resolution of NPAs, we expect some reversal in provisions over a period of time; however, we are not building in the same in our estimates.