Motilal Oswal: neutral on Power Finance; target of Rs 186

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26 Aug, 2025 12:21

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Motilal Oswal's research report on Power FinancePower Finance Corporation’s 3QFY16 reported PAT grew 3% YoY to INR15.82b (13% miss) led by higher provisions and margins contractions. Abs. NPLs spiked 57% QoQ led to increase in provisions to INR4.8b (est. of INR 2.8b). Uptick in NPLs also led to interest reversal resulting 30bp QoQ decline in NIMs to 4.98%.  Loan growth continues to slowdown (15.6% in 3QFY15 to 14.7% in FY15 to 11.6% in 3QFY16) to INR2.23t as overall demand remains subdued. Loans to SEBs (+17% YoY) continue to be a key driver of growth as the transitional finance continued. Share of private sector in the overall loan mix declined by 30/100bp QoQ/YoY to 15.7%. Under the UDAY scheme for financially distressed discoms, state governments would take over 75% of discom debt and remaining 25% of the debt would be guaranteed by the state government. While this would mitigate some asset quality concerns, but this would negatively impact earnings, as its yields would decline to ~10% from existing 12%. Further its spread/NIM would also decline 90bp/100bp to 2.4%/3.5% respectively. ROAs are likely to decline to ~2% and with ROEs at ~14% (down from 18%+ currently). While the stock trades at cheap valuation of 0.6x FY17 P/B, we are cutting our FY16/17 estimates by 11/20% to factor in lower yields and higher credit cost, we downgrade the stock to Neutral with a TP of INR186 (0.6x FY17BV).

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