Power Finance Corporation - Investment Research Report

Power Finance Corporation Ltd.

Brief Value Investing Based Equity Research Report

22nd November 2016

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Market Snapshot of PFC Share

Introduction:

Investors are often worried about investing money – where to invest money? They are likewise concerned, for a good reason of course, about risks associated with investment management and plagued by questions like which companies/ stocks are safe and good, will yield best returns, and so on.

This brief equity research report of Power Finance Corporation Ltd. is intended to address the serious and genuine investor concerns, allay their fears and answer their troubling questions.

This brief equity research report is carried out based on the value investing principles and fundamental analysis. It considers both the aspects involved in undertaking the study, namely company performance and the prevailing stock market conditions.

Critical prima-facie Observations:

1. PE Ratio: Power Finance Corporation (PFC)’s PE Ratio is 5.14 is very attractively below the ideal 10.
2. Price to Book Value Ratio: With PFC share price at 125.05, the price to book value ratio is very attractively placed at one-third the maximum recommended 1.50 times the book value at 0.46.
3. Distance from 52 week low: The current price is 78.34% away from the 52 Week Low. On this parameter the scrip is NOT in the attractive zone – rather it is very near the 52 Week High.
4. Dividend Yield: Again very attractively at 11.12% compared to the recommended minimum four to five percent and above.

1

In light of the above highly favourable conditions, Power Finance Corporation (PFC) shall definitely be accepted for further study.

A. Company Performance

Profitability Analysis

POWER FINANCE CORPORATION (CONSOLIDATED) Rs. in Crores [10 Millions]	March 31' 2013	March 31' 2014	March 31' 2015	March 31' 2016
Net sales	17,302.61	21,522.42	24,861.32	27,780.21
% age rise (+) or fall (-)	32.95%	24.39%	15.51%	11.74%
Cost of sales:
Interest, Finance & Other Charges	10,992.87	13,199.59	15,438.18	16,645.38
Bonds Issue Expenses	97.33	79.09	31.40	33.44
Provision for Contingency	80.85	469.89	842.91	1610.16
Personnel Expenses	90.91	79.56	85.81	106.63
Provision for Decline in Value of Investments	0.00	-0.15	1.06	96.26
CSR and Sustainable Dev. Exp		63.23	117.49	146.81
Other expenses	61.95	83.30	7.79	61.97
Prior Period Items (Net)	-8.92	-0.29	-2.16	-2.06
Depreciation	5.96	4.93	6.09	20.08
Total cost of sales	11,320.95	13,979.15	16,528.57	18,718.67
Operating profit after interest	5,981.66	7,543.27	8,332.75	9,061.54
Other non-operating income	11.86	15.04	45.48	105.56
Profit Before Tax	5993.52	7558.31	8378.23	9167.10
Provision for taxes	1555.78	2140.56	2418.90	2983.10
Profit After Tax (PAT)	4437.74	5417.75	5959.33	6184.00
EBDITA (Operating Profits)	5987.62	7548.20	8338.84	9081.62
EBDITA (Operating Profits) %	34.61%	35.07%	33.54%	32.69%
Depreciation	5.96	4.93	6.09	20.08
EBT	5981.66	7543.27	8332.75	9061.54
EBT %	34.57%	35.05%	33.52%	32.62%
Net Non-Operating Income	11.86	15.04	45.48	105.56
FINAL PBT	5993.52	7558.31	8378.23	9167.10
FINAL PBT %	34.64%	35.12%	33.70%	33.00%
Income Tax	1555.78	2140.56	2418.90	2983.10
PAT	4437.74	5417.75	5959.33	6184.00
PAT %	25.65%	25.17%	23.97%	22.26%

Remarks:

1. EBDITA margins are Excellent.
2. The company has been in consistent profits at least since 2008-09.
3. Under the profitability parameter, consistently good EBT and PAT margins urge strong recommendation for inclusion.

Balance Sheet Analysis:

POWER FINANCE CORPORATION (CONSOLIDATED) Rs. in Crores [10 Millions]	March 31' 2013	March 31' 2014	March 31' 2015	March 31' 2016
Liabilities
Short-Term Borrowings	8,819.77	1,314.49	4,064.41	7,571.57
Sundry Creditor (Trade)	1.15	-		69.65
Current Maturities Of Long Term Borrowings	9,612.08	15,409.00	18735.28	20474.00
Other Current Liabilities & Provisions	5,263.26	6,479.55	7,185.38	8,380.25
Total Current Liabilities	23,696.26	23,203.04	29,985.07	36,495.47
Long Term Borrowings-Secured	6,636.67	22,776.66	20,786.66	19,869.75
Long Term Borrowings-Un-Secured	1,14,514.19	1,19,714.91	1,44,186.80	1,52,744.82
Deferred Tax Liability	218.63	274.22	189.25	301.96
Long Term Provisions	162.35	473.04	963.61	1230.59
Other Term Liabilities	539.81	347.62	333.81	548.85
Total Term Liabilities	1,22,071.65	1,43,586.45	1,66,460.13	1,74,695.97
Total Outside Liabilities (TOL)	1,45,767.91	1,66,789.49	1,96,445.20	2,11,191.44
Ordinary Share Capital	1320.02	1320.04	1320.04	1320.04
Reserves & Surplus	22837.67	26054.57	30899.17	34708.27
Net Worth	24,157.69	27,374.61	32,219.21	36,028.31
TOTAL LIABILITIES	1,69,925.60	1,94,164.10	2,28,664.41	2,47,219.75
Assets:
Cash And Bank Balances	4753.81	60.14	5070.80	301.55
Investments	3.83	3.83	504.04	410.74
Receivables	-	-		111.21
Current Maturities Of Long Term Loans	15455.85	18042.95	16312.09	33634.42
Other Current Assets	5,992.87	6,636.42	8,296.78	9,941.27
TOTAL CURRENT ASSETS	26,206.36	24,743.34	30,183.71	44,399.19
Fixed Assets - NET BLOCK	70.56	68.18	64.06	197.02
Non Current Investments	187.18	348.34	347.28	1,819.23
Long Term Loans	142494.64	168792.11	197842.91	200380.71
Other Non-Current Assets	854.04	209.68	224.72	375.51
TOTAL OTHER NON-CURR.ASSETS	1,43,535.86	1,69,350.13	1,98,414.91	2,02,575.45
Intangible Assets	3.78	2.45	1.73	1.46
Intangible Assets under development				46.63
TOTAL ASSETS	1,69,816.56	1,94,164.10	2,28,664.41	2,47,219.75
TANGIBLE NET WORTH  (TNW)	24,153.91	27,372.16	32,217.48	35,980.22
Current Ratio	1.11	1.07	1.01	1.22
Total Outside Liabilities/ Tangible Net Worth (TOL/ TNW)	6.03	6.09	6.10	5.87
Total Term Liabilities/Tangible Net Worth	5.05	5.25	5.17	4.86

Highlights:

Many liquidity and solvency ratios appear poor. But these ratios cannot be applied just mechanically to a term lending institution like Power Finance Corporation, which meets payment obligations from recoveries of loans. These are applicable for non-financial, manufacturing, trading and similar businesses.

Therefore there are no negatives as far as balance sheet analysis is concerned and PFC can be included.

Dividends

Distribution of net Profits

Let us study the dividend distribution pattern of PFC:

	March 31' 2013	March 31' 2014	March 31' 2015	March 31' 2016
	4437.74	5417.75	5959.33	6184.00
Dividend	2775.30	3370.01	1441.46	2207.72
Dividend % of PAT	62.54%	62.20%	24.19%	35.70%

The above table shows that the company has been generously distributing about 25-35% of the net profits as dividends. On this count the company performance very good.

Uninterrupted Dividend Payment History

Announcement Date	Effective Date	Dividend Type
25/05/2016	11/08/2016	Final
03/02/2016	16/02/2016	Interim
11/12/2015	23/12/2015	Interim
28/05/2015	15/09/2015	Final
23/02/2015	04/03/2015	Interim
27/05/2014	10/09/2014	Final
17/01/2014	07/02/2014	Interim
30/05/2013	10/09/2013	Final
18/01/2013	04/02/2013	Interim
22/05/2012	05/09/2012	Final
20/01/2012	08/02/2012	Interim
20/06/2011	12/09/2011	Final
11/01/2011	21/01/2011	Interim
18/06/2010	03/09/2010	Final
13/01/2010	03/02/2010	Interim
15/06/2009	07/09/2009	Final
04/02/2009	24/02/2009	Interim
12/05/2008	14/07/2008	Final
23/01/2008	11/02/2008	Interim
18/06/2007	07/09/2007	Final

The above table shows uninterrupted dividend payment for the last 10 years.

On the dividends front Power Finance Corporation has impeccable credentials.

Dividend Yield:

Dividend Yield, is a combination of both the company’s dividend policy and performance as well as market condition. On this count too, a yield is very attractive at 11.12% compared to the minimum recommended 4-5% is excellent.

This shows that not only the company is handsomely distributing dividends but also that the price of the share is not unreasonably high to pull down the yield.

Five-year price graph:

% Year Price Graph of PFC Share

The graph above shows that the stock price of PFC having dipped to about Rs.75 in June 2016 (on the back of severe hammering inflicted by the market on banking finance stock for high levels of Non Performing Assets (NPAs), has recovered steeply and is not in any specially favourable condition.

Five years returns (price rise):

Besides the price graph, the five years return of +55.57% indicates that the price of the scrip has appreciated that much in the past five years and therefore there is no special advantageous condition here.

Distance from 52 Week Low:

52 Week Low: Rs.70.12

52 Week High: Rs.130.40

Current Market Price (CMP) on 22^nd November 2016: Rs.124.35

Distance from 52 Week Low is 78.34% which is not favorable. In fact it indicates that it is just 21.66% less than its 52 Week High. This means that the CMP is very near the highest price of the scrip in the last one year.

However please note that there is still opportunity for price increase from the present level of Rs.125 as we ourselves have bought this share at Rs.200 levels.

Final Conclusions:

1. The above brief analysis proves that Power Finance Corporation is without doubt a wonderful company and brand.
2. PE Ratio of 5.14  is very low and the company’s earnings will recover the investment in just 5.11 years.
3. Price to Book Value Ratio (P2BV) of just 0.46 means we are able to buy the net assets of this wonderful company at whopping 54% discount!
4. The EBDITA, EBT and PAT margins are very good.
5. The company is consistently profitable for many years into the past.
6. There are no adverse observations from the balance sheet angle.
7. Even though the market condition parameters of five-year price graph and distance from 52 Week low and five year returns do not bestow any special privilege, the market of the scrip is reasonable as shown by low PE and P2BV ratios and dividend yield.

Final Investment Advice:

Power Finance Corporation (PFC) is a wonderful company that will be a feather in the capo of any value investing portfolio and a must include at the current price levels.