ptc india finance ltdcontent.indiainfoline.com/wc/research/researchreports/pfs_080316.… ·...

Analyst: Rajiv Mehta

Franklin Moraes

[email protected]

Stock Data

Sensex: 24,646

52 Week h/l (Rs): 64/30

Market cap (Rscr) : 1,953

6m Avg t/o (Rscr): 5

Bloomberg code: PTCIF IN

BSE code: 533344

NSE code: PFS

FV (Rs): 10

Div yield (%): 3.5

Prices as on Mar 4, 2016

Company Rating Grid

Low High

1 2 3 4 5

Earnings Growth

RoA Progression

B/S Strength

Valuation appeal

Risk

Shareholding Pattern

Jun‐15 Sep‐15 Dec‐15

Promoters 60.0 60.0 60.0

FII+DII 13.8 13.9 13.5

Others 26.2 26.1 26.5

Share Price Trend

40

70

100

130

Mar‐15 Jun‐15 Oct‐15 Feb‐16

PFS SENSEX

PTC India Finance Ltd A compelling option!

BUY Sector: Financials Sector View: Positive

CMP: Rs34.7 1‐yr Target: Rs50 Upside: 44.1%

This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices,

estimates and views on sectors and markets… (Read the complete disclaimer at the back of this report)

Company Report

March 08, 2016

Change in Estimates Rating Target

25-30% pa loan growth sustainable without taking undue risks We see PFS comfortably sustaining its strong loan growth momentum of 30% pa in the coming years. This would be driven by substantial investments in the renewable energy space that country will continue to witness. Government’s ambitious green energy capacity addition target and supportive policy impetus has opened a gigantic financing opportunity. Strong credibility and efficient and robust sanction process greatly positions PFS amid a benign competitive environment. No wonder that contribution of renewable energy in company’s loan assets and sanctions is creeping up fast. While being excited about growth, the management has been cautious while selecting the promoters for funding. Share of renewable projects in loan book is expected to cross 55% by end FY18.

Portfolio concentration a key risk, but is gradually receding In project financing, loan concentration is the key risk that a financier has to live with. For PFS, it is more prominent given its small size. However, the trending of asset mix towards renewable segment is gradually de‐risking balance sheet given granularity in renewable lending (lower ticket size) and smooth execution experience of the projects. NPLs in renewable portfolio are negligible. Even in thermal portfolio where high concentration is worrisome, PFS does not expect any exposure to turn bad in the near term. Rather, traction in this book has improved off‐late as execution on many projects has picked‐up. About 80% of the projects funded are likely to get commissioned in FY17.

Healthy lending franchise available at valuation of a PSU Bank In our view, PFS’s RoA and RoE would settle at 2.7‐2.8% and 16‐17% in the long run. This would be underpinned by stabilization of spread and credit cost at 4% and 1% respectively. The company has room to respond to any increase in competitive pressure as cost of funding is moderating. PFS is trading at an undemanding valuation of 1x FY18 P/ABV; in‐line with PSU Banks, which seems unfair considering higher inherent profitability, robust growth prospects and strong capitalization. Recommend BUY with a 12‐month price target of Rs.50.

Financial Highlights Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Total operating income 385 475 582 702

yoy growth (%) 58.3 23.4 22.5 20.7

Operating profit (pre‐provisions) 345 443 540 648

Exceptional Item (61) 207 0 0

Net profit 161 394 292 356

yoy growth (%) (22.5) 145.0 (25.8) 21.7

EPS (Rs) 2.9 7.0 5.2 6.3

Adj.BVPS (Rs) 24.4 27.3 29.7 33.2

P/E (x) 11.7 4.8 6.5 5.3

P/adj.BV (x) 1.4 1.2 1.1 1.0

ROE (%) 11.6 24.7 15.7 16.8

ROA (%) 2.6 5.1 2.9 2.7 Source: Company, India Infoline Research

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PTC India Finance Ltd.

Government has set an ambitious target of reaching 175 GW of clean energy capacity by 2022

Renewable energy space witnessing robust traction India’s renewable energy capacity is set to leapfrog over the coming five years with the incumbent Government having set an ambitious target of reaching 175 GW by 2022. This would be nearly a five‐fold jump on the current base of ~38 GW. A large portion of the addition is targeted in solar power where the generation capacity is targeted to reach 100 GW from existing miniscule 4.4 GW. Wind power generation is expected to grow to 60 GW, a 2.5x growth on the current installed capacity of 24 GW. Going by the current capex requirement of ~Rs.6‐7cr/MW, the set targets imply a debt financing opportunity of Rs.6tn+ over the next 6‐7 years. On the ground investment activity has already picked pace with capacity addition target of FY15 being achieved; and during H1 FY16, capacity addition has grown by ~50% yoy. The key players who are active here are global utilities and PE‐backed IPPs. Ambitious target to increase renewable energy capacity by 2022

Source: CEA, MNRE

Annual capacity addition is accelerating

Source: CEA

25.14.9

4.2

4.760.0

100.0

5.0

10.0

Wind

Solar

Small Hydro

Bio power

Dec‐22Jan‐16

3.0

4.4

3.8

3.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

FY13 FY14 FY15 Upto Jan 16

(GW)

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Deep understanding of renewable energy sector and efficient loan turnaround positions PFS well Competitive environment is benign currently Co’s renewable portfolio has grown by 60%+ pa over the past two years Solar power projects are 50% of this book Avg. project exposure in this segment is at ~Rs50cr Contribution of renewable segment to surpass 55% by end FY18

PFS is sweetly positioned to benefit PFS stands to benefit disproportionately from the flurry of investment activity in the renewable energy sector. What works in favour of the company is its deep understanding of the sector and an efficient loan turnaround. PFS is a flat organization as compared to banks and thus funding proposals can be approved faster after a thorough appraisal of the project. This is an important consideration for a developer while approaching a financier as other things are generally in place; land site is acquired, PPA is signed, EPC contractor is appointed and procurement is indentified. The competitive environment is anyways benign currently with only some private banks active in this space. PSU Banks are showing less interest in funding any greenfield projects underpinned by risk averseness and capital constraints. While they are looking at opportunities to refinance an operational project, PFS has not witnessed any significant churning on account of this.

Strong growth in renewable energy portfolio to sustain; contribution to increase significantly Due to the aforementioned reasons, PFS is witnessing robust growth in its renewable energy loan book. The portfolio has grown by 60%+ pa over the past two years and its share in overall loan book has increased substantially to 45%. A large portion of this growth has been driven by solar projects where the activity is more bustling as compared to wind power. Solar projects now constitute 50% of PFS’ renewable portfolio; this compares to a negligible share at the end of FY14. Significant moderation in investment cost, stable PLF and supportive government policy has been driving higher activity in solar power capacity addition. India is poised to take its solar capacity to 20 GW by end FY17 with tendering of projects totaling a capacity of 15 GW already been completed.

The company’s renewable loan book of ~Rs. 3,500cr is spread across 70‐75 projects implying an average exposure of ~Rs. 50cr. In some cases, PFS underwrites full debt requirement of the project at the initial stage to earn fees and then down sells a large part of it to other financiers to mitigate the risk. Generally, company prefers to have a couple of co‐lenders in a project. Notwithstanding the robust growth in renewable portfolio, the sanction bank has grown by 2.4x in the past two years manifesting the significant investment activity. Thus, the outstanding sanction to loan book cover still stands at solid 2.1x bolstering growth visibility. We expect the renewable portfolio of PFS to continue to grow by 45‐50% pa and its share in overall loan book is likely to surpass 55% by end FY18.

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Renewable portfolio of PFS has been growing at brisk pace

Source: Company, India Infoline Research

Renewable projects contribution has increased significantly in loan book


With sanction share at 54%; contribution of renewable book will rise further


0.5

1.0

1.5

2.0

2.5

0.0

20.0

40.0

60.0

80.0

Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16

(x)(%)

LB growth yoy (%) Sanction growth yoy (%) Sanction Cover (x) ‐RHS

33.4 34.9 31.2 30.2 31.5 32.5 30.5 31.0

35.5 35.436.0 38.2 38.5 41.4 41.1 45.0

9.2 9.28.3 7.8 8.6

8.3 8.2 5.3

21.9 20.5 24.5 23.8 21.4 17.8 20.1 18.7

0%

20%

40%

60%

80%

100%

Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16

Thermal Renewable Hydro Others

42.2 43.135.1 32.0 29.6 28.6 25.9 25.4

30.2 29.734.2 40.1 42.7 46.5 51.0 54.0

11.4 11.311.2 9.5 9.3 8.9 8.0 6.0

16.2 15.9 19.6 18.4 18.4 16.0 15.2 14.6

0%

20%

40%

60%

80%

100%


Thermal Renewable Hydro Others

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Robust growth momentum in renewable segment to drive 30% pa growth in overall loan assets Growth of thermal portfolio to moderate thus accentuating the shift in asset mix

Overall loan book to grow by 30% pa over FY15-18 Galvanized by robust growth momentum in renewable portfolio, PFS’s loan book should grow by 30% pa in the coming years. This would be possible notwithstanding a likely moderation in growth of the thermal portfolio. This book has shown improved traction in the past few quarters aided by pick‐up in execution on many of the funded projects. As per the company, the operating environment in this space has improved in general over the past year with the new government addressing key bottlenecks. However, with ~80% of the funded projects approaching commissioning within company’s portfolio and no significant capacity addition happening in the sector, growth in thermal portfolio of PFS should moderate thus accentuating the shift towards renewable segment. Sturdy loan book growth to continue as visibility remains high


Improved traction in thermal portfolio, but growth visibility moderating


0.0

0.5

1.0

1.5

2.0

2.5

0

3,000

6,000

9,000

12,000

15,000


(x)(Rs cr)

Loan Book (Rs cr) O/S Sanctions (Rs cr) Sanction Cover (x)

1.0

1.5

2.0

2.5

3.0

(50.0)

(25.0)

0.0

25.0

50.0

Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16

(x)(%)

Sanction growth yoy (%) LB growth yoy (%) Sanction Cover (x) ‐RHS

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Spread has come‐off due to

compression in portfolio yield

Blended funding cost has declined

significantly

Incremental decline in funding

cost to offset probable pressure on

yield from increase in competition

and NPLs

Spread to be sustained above 4% barring severe asset quality deterioration In the recent quarters, PFS’s interest spread has come‐off to 4.1% on the back of compression in portfolio yield to 13%. The latter was driven by a) significant shift in asset mix towards renewable projects and b) deterioration in asset quality with a few projects being recognized as NPLs. As per the management, the yield on renewable portfolio is at ~12%, 100bps lower than blended. However, this is mainly on account of the associated cost of funds being lower. For funding projects in renewable space, the company has access to long term loans from multilateral financial institutions (MFIs) which come at much lower rate than bank borrowings.

Broadly, PFS has seen its blended borrowings cost moderate significantly over the past four quarters aided by decline in the share of bank funding and its substitution by cheaper avenues such as loans from MFIs, NCDs/Bonds and CPs. The company intends to keep the share of short term borrowings at 15% so as to not stretch the ALM. While headroom to add cheaper CPs is not there, the funding cost is still expected to moderate further over the coming quarters with higher incremental borrowings in the form of MFI loans and Bonds and banks moving to marginal cost of funds based Base Rate determination. Currently, PFS is borrowing at Base Rate from most banks. We believe that incremental decline in funding cost would offset the probable pressure on portfolio yield from any increase in competition and NPLs.

Borrowing mix has changed significantly in FY16


4230

51

80 80

54

12

18

26

12 9

758 52

238

6

11

516

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015 Q3 FY16

Loans ‐Banks Loans ‐ FIs ECBs Bonds/Debentures Commercial Paper

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Lumpy exposures in thermal power segment; average at ~Rs. 150‐160cr 80% of total projects funded are expected to commence operation in FY17; this should alleviate portfolio risk

Credible concerns around asset quality Lumpy exposures in thermal power segment remain a key concern for PFS. This portfolio of Rs. 2,420cr is spread across 15‐16 projects implying an average exposure of ~Rs. 150‐160cr, equivalent to 2% of loan assets and 9% of networth. Already two accounts ie Konaseema and Surana Power have been classified as NPLs in the past 12 months. The management is confident about future performance of remaining assets as they are servicing interest obligations. Fortunately, the operating environment has improved in the recent past and developmental progress of these projects has picked‐up (also visible in the spurt in thermal loan book recently). About 80% of the total projects funded (11‐12) are expected to commence operation in FY17, and this should alleviate portfolio risk. PFS also has lumpy loans in ‘others’ segment (value chain financing) which includes a ~Rs. 200cr exposure to Tamil Nadu SEB. Amongst exposure to the stressed groups, PFS has an exposure of Rs. 250cr to Jaypee’s power project and infra loans to GMR. However, these loans are well serviced and have not exhibited any stress.

Portfolio yield has declined more than funding cost … consequently, spread has come‐off


6.0

7.5

9.0

10.5

12.0

13.5

15.0

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

Q2 FY16

Q3 FY16

(%)Yield on Loan Assets (%) Cost of Funds (%)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

Q2 FY16

Q3 FY16

(%) Interest Spread (%) NIM (%)

Lumpy project exposure is a threat to asset quality Credit cost to remain elevated at ~1%


0.1

1.3

3.5

4.0 4.2

0.0

1.0

2.0

3.0

4.0

5.0

FY14 FY15E FY16E FY17E FY18E

(%)

0.3

0.5

0.7

0.91.0

0.9

0.0

0.2

0.4

0.6

0.8

1.0

1.2

FY13 FY14 FY15E FY16E FY17E FY18E

(%)

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Valuation at 1x FY18 P/ABV is quite attractive; at par with PSU Banks

Net NPL to Networth could climb further


Return ratios to stabilize at healthy levels; valuation appealing We expect PFS’s profitability to settle at reasonably healthy levels in the longer term. Brisk growth and stable spread should enable company to deliver 2.7‐2.8% RoA and 16‐17% RoE on ongoing basis even if credit cost were to normalize to 1%. Considering this and also the near‐term asset quality concerns, we believe that PFS’s valuation at 1x FY18 P/ABV is quite attractive and thus investment risk‐reward is favourable. Also our relative argument is that company’s valuation is currently at par with some of the PSU Banks who are grappled with multiple issues including a low capital base. PFS has a well‐buffered balance sheet with Tier‐1 capital at 21‐22%.

0.0

4.4

12.5

15.7

17.3

0.0

4.0

8.0

12.0

16.0

20.0

FY14 FY15E FY16E FY17E FY18E

(%)

Sustainable RoA at 2.7‐2.8% and RoE at 16‐17% Capital position is strong


0.0

5.0

10.0

15.0

20.0

25.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0


(%)(%)

RoE (%) ‐RHS RoA (%)

42.0

25.223.7 22.7

20.218.4

0.0

10.0

20.0

30.0

40.0

50.0


(%)

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Valuation (1‐yr fwd P/ABV) has corrected sharply … currently at 5‐year mean


0

20

40

60

80

100

Apr‐11

Jul‐11

Oct‐11

Jan‐12

Apr‐12

Jul‐12

Oct‐12

Jan‐13

Apr‐13

Jul‐13

Oct‐13

Jan‐14

Apr‐14

Jul‐14

Oct‐14

Jan‐15

Apr‐15

Jul‐15

Oct‐15

Jan‐16

(Rs)

2.7x

2.1x

1.6x

1.0x

0.4x

‐

0.6

1.2

1.8

2.4

3.0

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

Sep‐13

Mar‐14

Sep‐14

Mar‐15

Sep‐15

Mar‐16

1‐yr rolling P/ABV Mean

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Financials Income statement Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Income from Opns 802 999 1,249 1,551

Interest expense (417) (524) (668) (850)

Net interest income 385 475 582 702

Non‐interest income 0 0 0 0

Total op income 385 475 582 702

Total op expenses (39) (32) (41) (54)

Op profit (pre‐prov) 345 443 540 648

Provisions (39) (70) (100) (120)

Exceptional Items (61) 207 0 0

Profit before tax 245 580 440 528

Taxes (84) (186) (148) (172)

Net profit 161 394 292 356

Balance sheet Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Equity Capital 562 562 562 562

Reserves 875 1,190 1,417 1,694

Shareholder's funds 1,437 1,752 1,979 2,256

Long‐term borrowings 3,765 4,969 6,709 8,856

Deferred tax liabilities 8 11 16 22

Other Long‐term liab 0 0 0 0

Long‐term provisions 68 95 133 187

Total Non‐current liab 3,841 5,076 6,858 9,064

Short Term Borrowings 1,160 1,531 2,067 2,728

Trade payables 3 3 3 3

Other current liabilities 241 319 430 568

Short term provisions 68 81 97 117

Total Current liabilities 1,472 1,934 2,598 3,416

Total Equities and Liab 6,750 8,762 11,434 14,737

Assets

Fixed Assets 22 24 27 29

Non‐current investments 340 235 235 235

Long‐term loans and adv 5,485 7,296 9,557 12,424

Other non‐current assets 35 42 50 60

Total Non‐current assets 5,882 7,596 9,869 12,748

Trade receivables 1 1 1 1

Cash and cash equiv 23 42 94 74

Short‐term loans and adv 208 277 363 472

Other current assets 636 846 1,108 1,441

Total Current assets 868 1,166 1,566 1,988

Total Assets 6,750 8,762 11,434 14,737

Key ratios Y/e 31 Mar FY15 FY16E FY17E FY18E

Growth matrix (%)

Net interest income 58.3 23.4 22.6 20.7

Total op income 58.3 23.4 22.5 20.7

Op profit (pre‐provision) 56.0 28.2 22.1 19.9

Net profit (22.5) 145.0 (25.8) 21.7

Advances 28.2 33.2 31.1 29.7

Borrowings 30.8 31.5 34.9 32.3

Total assets 24.7 29.8 30.5 28.9

Profitability Ratios (%)

NIM 6.8 6.4 5.9 5.5

Non‐int inc/Total inc 0.0 0.0 0.0 0.0

Return on Avg Equity 11.6 24.7 15.7 16.8

Return on Avg Assets 2.6 5.1 2.9 2.7

Per share ratios (Rs)

EPS 2.9 7.0 5.2 6.3

Adj.BVPS 24.4 27.3 29.7 33.2

DPS 1.0 1.2 1.0 1.2

Other key ratios (%)

Loans/Borrowings 1.3 1.3 1.2 1.2

Cost/Income 10.2 6.7 7.1 7.6

CAR 23.7 22.7 20.2 18.4

Tier‐I capital 23.7 21.7 18.7 16.4

Gross NPLs/Loans 1.3 3.5 4.0 4.2

Credit Cost 0.7 0.9 1.0 0.9

Net NPLs/Net loans 1.0 2.6 2.8 2.7

Tax rate 34.4 32.0 33.6 32.6

Dividend yield 3.0 3.6 3.0 3.6

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‘Best Broker of the Year’ – by Zee Business for contribution to broking Nirmal Jain, Chairman, IIFL, received the award for The Best Broker of the Year (for contribution to broking in India) at India's Best Market Analyst Awards 2014 organised by the Zee Business in Mumbai. The award was presented by the guest of Honour Amit Shah, president of the Bharatiya Janata Party and Piyush Goel, Minister of state with independent charge for power, coal new and renewable energy.

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +15%

Accumulate – Absolute return between 0% to +15%

Reduce – Absolute return between 0% to ‐10%

Sell – Absolute return below ‐10%

Call Failure ‐ In case of a Buy report, if the stock falls 20% below the recommended price on a closing basis, unless otherwise specified by the analyst; or, in case of a Sell report, if the stock rises 20% above the recommended price on a closing basis, unless otherwise specified by the analyst

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