ICRA assigns fundamental grade '4' to Power Finance

ICRA Online has assigned the Fundamental Grade '4' and the Valuation Grade 'A' to Power Finance Corporation (PFC). The Fundamental Grade "4" assigned to PFC implies that the company has "Strong Fundamentals”. The Valuation Grade ‘A’ assigned to PFC implies that the company is "significantly undervalued” on a relative basis (as on the date of the grading assigned).

PFC is a specialized Development Financial Institution, which was set up in 1986 with the objective of funding projects in the domestic power sector. PFC provides loans for a range of activities from generation to distribution, transmission, renovation and maintenance and other related activities. PFC finances state sector entities such as State Electricity Boards (SEBs) and State Generating Companies (SGCs) and Independent Power Producers (IPPs). In addition, PFC has been appointed as the nodal agency to develop sixteen Ultra Mega Power Projects (UMPP’s). Generation projects constituted around 83% of PFC’s loan book as on March 31, 2012 ,Distribution being 4%, Transmission 8% and others 6%. PFC is registered as an NBFC IFC (Infrastructure Finance Company) with RBI. Typically tenure of loans for generation projects is around 15 years including 3-4 years of implementation and 6 months of moratorium.

PFC is strategically important to the Government of India (GOI) as a key agency for implementation of its power development programme. PFC is the nodal agency for implementation of Ultra mega Power Projects (UMPP’s) and also for routing of government grants/loans under its Restructured Accelerated Power Development and Reforms Programme (R-APDRP) scheme. Government of India held a 73.72% stake in PFC as on March 31, 2012.

Valuation Rationale
PFC stock has been trading at a significant discount to various indices. Systemic concerns with respect to the overall deteriorating financial health of PFC’s main customers i.e. state power utilities, project delays and fuel linkages, have contributed to the overall reduction in valuation multiples of the sector as well as PFC. The company has been trading at a discount to its own historical prices. However, going forward considering the robust earning expectations for the corporation, we expect the forward P/E ratio for the company to improve further going forward., ICRA Online has assigned a valuation grade of ‘A’ to PFC on a grading scale of ‘A to E,’ which indicates that the company is “significantly undervalued” on a relative basis.

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