Buy PFC; target of Rs 150: Axis Direct

Axis Direct's research report on PFC

PFC reported a PAT of Rs 14.3 bn (down 17% YoY) dragged by higher provisions (up 137% YoY) and lower NII (down 7% YoY). Headline asset quality was largely stable with GNPA ratio at 12.5% (down 4 bps QoQ) with ~18% coverage ratio. Margin recovered to 4.4% level post sharp decline last quarter (due to interest reversals). Loan growth improved to 12% YoY on a favorable base.  As stated in Q4FY17 update, management expects ~80% of GNPAs (which slipped to NPLs, as it migrated from MoP/GoI approved prudential norms to RBI norms) to be upgraded in FY18. These loans are state sector loans and have fuel supply/power purchase agreements in place. These upgrades would improve the headline GNPA sharply (expects GNPA of 6.3% in FY18 vs. 12.5% currently).

Outlook

Upgrades will be key monitorable for FY18 and if management’s optimism pan out, the stock could see significant delta on ABV. Strong pipeline in sanctions provides comfort on loan growth visibility; however, we will also monitor NIM, as loan mix is skewing away from high-yielding generation loans. At CMP of Rs 124, PFC trades attractively at 1.1x/0.9x FY18E/19E P/ABV of Rs 111/Rs 136 respectively. We reiterate BUY and maintain the target price of Rs 150 (1.1x FY19 ABV), implying 21% upside. We have not built in complete NPA recovery as enunciated by the management, and this may be a source of upside risk to our estimates.