Hold Power Finance Corporation; target of Rs 235: Edelweiss

Power Finance Corporation’s (PFC) Q1FY17 PAT of INR 17bn was higher than estimate on better revenue momentum (up 12% QoQ). NII was supported by improved NIMs (up 50bps QoQ to 4.93%) following unwinding of interest income reversal and lower funding cost (no one-offs, refer page 2 for details), while loan growth was muted (flat YoY). While asset quality was broadly stable (marginal rise in GNPLs (INR75.5bn) and restructured book (INR 335bn)), higher slippages from restructured book could deepen challenges. Despite favourable valuations at 0.8x FY18E P/ABV, near-to medium term challenges and uncertainties relating to riskier impaired loans could challenge company’s high return profile. Maintain ‘HOLD’.

Though implementation of UDAY augurs well for the entire power value chain, it poses risks to PFC’s near to medium term earnings. While valuations (at 0.8x FY18E P/ABV) are undemanding, uncertainties could challenge the company’s high returns profile and risks surrounding its impaired loans seem to be fairly priced in the stock. Hence, we maintain ‘HOLD/SP’ with target price of INR 235