Buy PFC with target of Rs 290/share: Motilal Oswal

The follow-on-public offer of Power Finance Corporation (PFC) - leading financial institution in India focused on the power sector - opened for subscription. PFC offers more than 22.95 crore equity shares through the public offer at a price band of Rs 193-203/share.

Motilal Oswal has initiated coverage with a buy recommendation on the stock and set a target price of Rs 290, 37% upside over current market price of Rs 211/share.

Company provided 5% discount to retail bidders & eligible employees through the issue, which will close on May 12 for qualified institutional bidders and May 13 for all other bidders.

Motilal Oswal says that PFC is well placed to leverage the strong demand for financing in the power sector, with its leadership position and strong domain knowledge. "Planned capital raising of Rs 35 billion (overall capital raising of Rs 47 billion; government stake sale of Rs 11.6 billion) would support faster loan growth and provide the
ability to take higher exposure to single/group borrowers."

Oswal expects PFC to clock a 20% CAGR in loan disbursals over FY11-FY13 and consequently a 23% CAGR in its loan book to Rs 1.5 trillion by FY13.

"Well matched asset-liability profile has been cushioning PFC against interest rate risks; however, rising competition and bulk borrowing rates are likely to impact spreads," the report said.

"We model PAT CAGR of 18% over FY11-13, supported by lean cost structure and minimal credit cost. We expect the return ratios to remain strong, with RoA of ~2.7% and RoE of 16-17% (post dilution) for FY12-13."

The report said heightened concerns over SEB losses and expected slowdown in loan growth (due to environment clearance issues) have led to a sharp 45% correction in stock price from the peak.

Motilal Oswal believes current valuations are attractive at 1.2x FY13E BV and has initiated coverage with a buy recommendation and a target price of Rs 290 (1.6x FY13E BV), 37% upside.

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