Fundamental and Valuation Grades

ICRA Online has assigned the Fundamental Grade 4 and the Valuation Grade A to Power
Finance Corporation (PFC). The Fundamental Grade 4 assigned to PFC implies that the
company has Strong Fundamentals. The Valuation Grade A assigned to PFC implies that
the company is significantly undervalued on a relative basis (as on the date of the
grading assigned).

PFC is a specialized Development Financial Institution, which was set up in 1986 with the
objective of funding projects in the domestic power sector. PFC provides loans for a range of
activities from generation to distribution, transmission, renovation and maintenance and other
related activities. PFC finances state sector entities such as State Electricity Boards (SEBs) and
State Generating Companies (SGCs) and Independent Power Producers (IPPs). In addition, PFC
has been appointed as the nodal agency to develop sixteen Ultra Mega Power Projects (UMPPs).
Generation projects constituted around 83% of PFCs loan book as on March 31, 2012
,Distribution being 4%, Transmission 8% and others 6%. PFC is registered as an NBFC IFC
(Infrastructure Finance Company) with RBI. Typically tenure of loans for generation projects is
around 15 years including 3-4 years of implementation and 6 months of moratorium.
PFC is strategically important to the Government of India (GOI) as a key agency for
implementation of its power development programme. PFC is the nodal agency for
implementation of Ultra mega Power Projects (UMPPs) and also for routing of government
grants/loans under its Restructured Accelerated Power Development and Reforms Programme
(R-APDRP) scheme. Government of India held a 73.72% stake in PFC as on March 31, 2012.

Grading Positives
1) Robust energy demand outlook provides attractive growth opportunities for the
company.
2) Augmentation of equity through FPO , large networth and liberal exposure norms for
state sector would enable PFC to take large exposures and grow the portfolio going
forward
3) Diversified funding profile with access to low cost funds like External Commercial
Borrowings, infrastructure bonds and tax free bonds
4) Operating expenses likely to remain low going forward, thereby supporting the
earning profile, though credit costs could go up from current levels
5) Experienced management and operational team, well laid out credit appraisal and
monitoring systems have helped the corporation to establish itself as a preferred
lender in the power sector
6) Remains strategically important for GoI for implementing initiatives for the progress
of power sector.
Grading Sensitivities
1) Single sector exposure leading to higher concentration risk ,exposes the company to
vulnerabilities in the power sector; concentration risk further aggravated on account
of large exposures to financially weak state power utilities, however healthy past
track record and default escrow mechanism, mitigate the risks to some extent
2) Ability to control collections from the IPP segment, which are exposed to counter
party risks and fuel availability risks
3) Competitive position vis-a-vis banks constrained due to absence of access to retail
and Current and Saving Account deposits leading to higher cost of funds and lesser
avenues to grow fee based income although return indicators are supported due to
higher yields and lower operating expenses

PFC: Key Financial Indicators
Mar-11 Mar-12 Mar-13 Mar-14
Net Interest Income 3414 4236 5752 6972
Total Operating Income 3653 4376 7218 7218
PAT 2599 3032 4087 5123
ROA 2.52% 2.77% 2.63% 2.59%
EPS (Rs.) 22.64 22.97 30.96 38.81
EPS Growth (%) 11.0% 12% 35% 25%
P/E (x) 7.99 7.88 5.85 4.66
Book value per share 132 157 181 211
P/BV (x) 1.37 1.15 1.00 0.86
RoE 18.4% 16.9% 18.3% 19.8%
Source: Company Financials and ICRA Online estimates
Amounts in Rs. crore
ICRA Online Grading Matrix
Valuation Assessment
F
u
n
d
a
m
e
n
t
a
l

A
s
s
e
s
s
m
e
n
t

A B C D E
5
4 4A
3
2
1
Fundamental Grading of 4 indicates very strong
fundamentals
Valuation Grading of A indicates significantly
undervalued on a relative basis
Key Stock Statistics
Bloomberg Code POWF In Equity
Current Market Price* (Rs.) 181
Shares Outstanding (crore)
132.0

Market Cap (Rs. crore) 23917
52-Week High (Rs.) 224
52-Week Low (Rs.) 130
Free Float (%) 23%
Beta 1.20
6 Month Avg Daily Volumes Rs 7.14 cr
Source: Bloomberg

PFC: Current Valuations

Source: ICRA Online Estimates

Shareholding Pattern (31
st
Mar-2012)

Source: BSE

Share Price Movement (18 months)


Source: NSE
0
1
2
3
4
5
6
7
8
FY2011a FY2012e FY2013e FY2014e
P/E P/BV
0
1000
2000
3000
4000
5000
6000
7000
0
50
100
150
200
250
300
350
J
a
n
-
1
1
F
e
b
-
1
1
M
a
r
-
1
1
A
p
r
-
1
1
M
a
y
-
1
1
J
u
n
-
1
1
J
u
l
-
1
1
A
u
g
-
1
1
S
e
p
-
1
1
O
c
t
-
1
1
N
o
v
-
1
1
D
e
c
-
1
1
J
a
n
-
1
2
F
e
b
-
1
2
M
a
r
-
1
2
A
p
r
-
1
2
M
a
y
-
1
2
J
u
n
-
1
2
PFC NIFTY(RHS)
ICRA EQUITY RESEARCH SERVICE
POWER FINANCE CORPORATION
July 5, 2012 Industry: Infrastructure Finance
ICRA Equity Research Service Power Finance Corporation


2



SUMMARY

Preferred financier to the power sector, market share may increase going forward
PFC is strategically important to the GOI given the significant role it plays as a lead financier to the sector and also as a
nodal/routing agency for implementation of various government programmes to promote development in the power
sector. PFCs portfolio registered a robust growth over the past few years on the back of significant investment
demand in the power industry. PFCs portfolio has expanded at a 5 year +CAGR of 24% to Rs. 1,30,071 crore as on
March 31, 2012, This share had been declining till FY2011, as during this period banks increased their lending to the
sector, however PFCs share increased in FY2012 from 21% to 22%. Going forward the banking system may not be
able to sustain their high pace of expansion in the sector, as several banks are hitting their industry exposure limits.
Therefore PFC would be in a position to increase its market share going forward.

Strong demand outlook to facilitate growth in portfolio, however significant policy measures and tariff hikes
required to facilitate investments
Given the existing deficit situation, and likelihood of continued growth in energy requirements, ICRA Online expects
an incremental capacity requirements of 95,000 MW by end of next XII Plan (until March 2017) and about 1,80,000
MW by end of FY 2022, assuming energy demand to grow at 6.5% per annum and loss levels to improve
1
steadily .
Despite the good demand potential, following concerns could have a dampening effect over investments within the
industry.

Insignificant Tariff hikes in relation to cash losses
Uncertainties with respect to fuel linkages
Concerns regarding environmental clearances
Concerns regarding Land acquisition

Assuming reasonable policy action to address the power sector issues, we estimate investment requirements for the
generation segment alone during XII Plan period are expected to remain at over Rs. 5,00,000 crore. With equivalent
amount of investments requirements for Transmission & Distribution (T&D) segment, overall investment potential
thus remains high which further lead to large-sized debt funding requirements of over Rs. 7,00,000 crore, assuming
the funding mix (Debt: Equity at 70:30).

Issues faced by the power sector at present may not impact the growth prospects of PFC, as PFC had large un-
disbursed sanctions aggregating to over Rs. 1,83,616 crore as on March 2012. Against these outstanding sanctions,
ICRA Online estimates that PFC would be in a position to grow its portfolio at over 25% over the next three financial
years, assuming full disbursement against sanctions where disbursement has commenced, 75% disbursements where
documents have been executed and 40% disbursement against sanctions where disbursements are yet to commence.
Over the longer term growth opportunities of PFC would continue to remain healthy given the estimated PFC share of
financing in the next 5 year plan of over Rs. 1,20,000 crore. (over and above the unutlised sanctions of Rs 1,83,616
crore as on Mar-2012)

Competitive positioning supported by ability to take large exposures; however any future requirement to
comply with RBI exposure norms could restrict growth
PFCs large net worth (Rs. 20,708 crore as on March 31, 2012) has enabled it in the past to take large exposures on
projects, which has supported its competitive positioning. Furthermore within the state power sector PFC has
permission from RBI to formulate its own exposure norms; accordingly PFC can lend upto 150% of its net worth to a
single state sector utility, against upto 25% of capital funds (Tier 1 and Tier 2) for banks. However growth of PFC
could get constrained under the circumstance that it be required to adopt RBIs exposure norms
2
on its state sector
lending. Under such a scenario PFC would need to bring down its exposures to certain states and would constrain its
ability to take incremental exposures. However given the current paucity of funding available to sustain the proposed
investment in the power sector PFC could continue to be allowed more liberal lending norms. Stricter concentration
norms may force PFC to curtail exposures to better credit profile states, thus making it dependent on relatively weak
credit profile states for growth.

1 T&D Loss level at 29% for FY 2012 assumed to improve to 22% by end of FY 2022.
2
Current exemptions are valid till March 2013
ICRA Equity Research Service Power Finance Corporation


3




Share of Private sector exposures expected to increase
PFCs exposure to Independent Power Producers (IPPs) accounted for 11% of its total advances as on March 31, 2012.
Based on ICRA Online estimates, the share of portfolio towards IPP could increase to close to 20% over the next 3
financial years and further to around 30% of the total portfolio over the long term. While the increase in proportion of
exposures to the Independent Power Producers (IPP) segment would increase yield on portfolio, at the same time the
risk profile of PFC would increase.

Some deterioration in asset quality seen, however delays in policy action could trigger restructuring / higher
NPAs

PFC has observed some slippages in the current financial year and the Gross NPA% increased from 0.23% as on Mar-
2011 to 1.04% as on March 31, 2012 primarily on account of slippage in two large accounts Shri Maheshwar Hydel
Power Project(approx Rs 700 crore
3
) and Konaseema Gas Power(approx Rs 387 crore). While reported asset quality
indicators of PFC remain comfortable, 56% of the portfolio of PFC is where repayments have not started. Further,
with the rising share of private sector projects in the overall portfolio mix, the riskiness of the portfolio would
increase going forward.

Given the current concerns with respect to shortages of domestic coal availability and the deterioration in health of
state power utilities thereby increasing counter party risks on generating companies, asset quality indicators of PFC
may deteriorate. Despite these challenges PFC could still continue to maintain low NPAs because of default escrow
mechanism in all cases, possibility of restructuring some accounts and differentiated
4
NPA recognition norms for state
government guaranteed exposures. Further, despite such possible deterioration in collections over medium term,
eventual losses from State Government entities could remain low.

Earnings expected to remain comfortable in medium term , some build-up in NPAs to be offset by higher
interest spreads
Earnings profile of PFC has in the past been supported by its healthy interest spreads, low operating expenses and low
credit provisions. We expect increase in share of private sector exposures(where yields are higher by 75-100 bps) and
repricing of assets to increase the overall yield on portfolio, however, some build-up in Non Performing Assets could
impact the overall yield on advances and hence spreads for the corporation. With infusion of equity through the
Follow on Public Offer in Q12011-12, leveraging levels of PFC have declined which would led to some moderation in
Return on Equity for 2011-12. However, PFC with its larger capital base is well poised to take advantage of the robust
growth opportunities offered in the power sector. ICRA Online expects PFC to maintain a return on equity of around
18-19% over the medium term.

Valuation Rationale
PFC stock has been trading at a significant discount to various indices. Systemic concerns with respect to the overall
deteriorating financial health of PFCs main customers i.e. state power utilities, project delays and fuel linkages, have
contributed to the overall reduction in valuation multiples of the sector as well as PFC. The company has been trading
at a discount to its own historical prices. However, going forward considering the robust earning expectations for the
corporation, we expect the forward P/E ratio for the company to improve further going forward., ICRA Online has
assigned a valuation grade of A to PFC on a grading scale of A to E, which indicates that the company is significantly
undervalued on a relative basis.



3
Shri Maheshwar Hydel Power Project had got special dispensation to treat the project as standard upto March 31, 2012.
4
A facility which is backed by the Central/State Government guarantee or by the State Government undertaking for deduction from central plan
allocation or a loan to State department , would remain standard for a period not exceeding 12 months from the date from which Companys dues
have not been paid by the borrower.
ICRA Equity Research Service Power Finance Corporation


4



Chart 1: Power Deficits and Incremental Capacity Requirements
BUSINESS AND COMPETITIVE POSITION

Key lender to Power Sector and strategically important to Government of India for development of the power
sector and implementation of Government programmes
PFC is strategically important to the GOI given the significant role it plays as a lead financier to the sector and also as a
nodal/routing agency for implementation of various government programmes to promote development in the power
sector. PFC is the nodal agency for routing of government grants under its Restructured Accelerated Power
Development and Reforms Programme (R-APDRP) programme and is also the nodal agency for development of
UMPPs (Ultra Mega Power Projects) in the country. This role, along with the ability to take larger exposures because
of its large Net worth (Rs. 20,708 crore as on March 31, 2012) and liberal exposure norms (for State Sector) has given
PFC significant leverage in the past to establish itself as the preferred financier in the power sector and has also
facilitated it in managing its portfolio quality while lending to inherently weaker credit profile state power utilities.

Strong demand outlook, however significant policy measures required to facilitate investments
Per capita consumption of power in India has grown from 566.7 kWh/year in fiscal 2003 to 733.5 kWh/year in fiscal
2009. The Government of India (GoI) has set a goal of 1,000 kWh per capita by fiscal 2012 in its mission of Power for
All by 2012 under the National Electricity Policy. GoIs programmes to drive power connectivity and healthy medium
term economic growth prospects are likely to continue to drive demand for power. Furthermore with the continued
growth in power demand and slippages in capacity addition have resulted in fairly high level of power deficit levels in
the country with the energy & peak deficits at 8.5% and 10% respectively in FY 2011. Given the existing deficit
situation, and likelihood of continued growth in energy requirements, ICRA Online expects an incremental capacity
requirements of 95,000 MW by end of next XII Plan Period (until March 2017) and about 180,000 MW by end of FY
2022, assuming energy demand at 6.5 % per annum on conservative basis.

Despite the good demand potential, following concerns could have a dampening effect over investments within the
industry.
Relatively high counterparty credit risks associated with the consuming entity i.e. Discoms arising mainly out
of inadequate tariffs in relation to cost of supplies
Uncertainties with respect to fuel linkages and likely dependence on high cost imported coal which may
increase cost of supplies making power projects unviable.
Concerns regarding land acquisition and environmental clearances

Lately however, certain initiatives are being taken to improve the health of both the distribution and generation
entities. While it is uncertain how quickly and strictly these measures are going to be implemented, ICRA Online
derives comfort from the initiation of these steps.
4%
6%
8%
10%
12%
14%
16%
18%
FY' 04 FY' 05 FY' 06 FY' 07 FY' 08 FY' 09 FY' 10 FY' 11
Energy Deficit Peak Deficit
131121
246800
0
40,000
80,000
120,000
160,000
200,000
240,000
280,000
By March 2017 By March 2022
M
W
ICRA Equity Research Service Power Finance Corporation


5




Key Steps initiated in the Distribution Sector

ATEs directive to SERCs aimed to enforce regulatory discipline for timely tariff determination
The Appellate Tribunal for Electricity
5
(ATE) issued a judgement in its order dated November 11, 2011
6
and in its
judgement has directed all State Electricity Regulatory Commission(SERCs) to initiate suo-moto proceedings for tariff
determination in case of delays by the utilities in filing of tariff petition. Key features of Appelate Tribunal for
Electricity(ATEs) directive are mentioned in Box 1.









Though this is a positive development on regulatory front for the power distribution sector. However, the impact of
this judgement by ATE on the financial position of the utilities will hinge upon its implementation by SERCs in an
independent manner without any kind of influence from the state government/utility. In addition to this, poor data
availability, given the significant delays in the finalisation of accounts as well as operational in-efficiencies in energy
audit system in some cases, could also pose a constraint for initiation of such tariff proceedings by SERCs themselves.



5
In line with the provision of Electricity Act (EA) 2003, Central Government has established an Appellate Tribunal to be known as the Appellate Tribunal
for Electricity to hear appeals against the orders of the adjudicating officer or the Appropriate Commission. As per the section 121 of EA-2003, The
Chairperson of the Appellate Tribunal shall exercise general power of super-intendance and control over the Appropriate Commission.
6
A suo-moto request petition was initiated by Ministry of Power, Government of India to ATE in January 2011, so that ATE can exercise its regulatory
authority under section 121 of the EA-2003 to provide directions to all SERCs.
Box 1: Salient Features of ATEs Order dated November 11, 2011
It should be the endeavour of every State Commission to ensure that the tariff for the financial year is decided
before 1
st
April of the tariff year, for which tariff petition should be filed by end of November of the previous
year. Truing-up should also be an annual exercise.
In the event of delay in filing of the ARR, truing-up and Annual Performance Review, one month beyond the
scheduled date of submission of the petition, the State Commission must initiate suo-moto proceedings for
tariff determination.
The recovery of the Regulatory Asset (RA) should be time bound and within a period not exceeding three years
at the most and preferably within control period. Carrying cost of the RA should be allowed to the utilities in
the ARR of the year in which the RA are created to avoid problem of cash flow to the distribution licensee.
Fuel and Power Purchase cost is a major expense of the distribution Company which is uncontrollable. The Fuel
and Power Purchase cost adjustment should preferably be on monthly basis but in no case exceeding a
quarter. Any State Commission which does not already have such formula/mechanism in place must within 6
months of the date of this order must put in place such formula/ mechanism.
ICRA Equity Research Service Power Finance Corporation


6



Finalisation of the Shunglu Panel report; implementation would prove to be a challenge
A Panel headed by Shri V. K. Shunglu, appointed by the Planning Commission in July 2010 (with an objective of study
to suggest measures for improvement in the commercial viability of distribution sector) issued the report
7
on financial
position of distribution utilities in December 2011. This Committee has given several recommendations on the way
forward which are highlighted in Box 2:












However, implementing the recommendations could be particularly challenging, given that several stakeholders like
discoms, state governments and regulatory entities (SERCs) should need to be involved. Also there is no clarity on
what the RBIs view is on what is perhaps the most important recommendation of the Committee, namely purchase of
loans under stress which are on the books of banks by new SPV (proposed to be 76% held by RBI).



7
The report has assessed a) the financial position of distribution utilities between FY 2005 and FY 2010, b) electricity tariff determination
process including roles of State Government, SERCs and utilities, c) system improvement measures & operational issues and d) action
plan to achieve the financial viability for distribution sector by 2017.
Box 2: Key Recommendations by the Shunglu Committee
SPV to be set up as a corporate entity (76% held by RBI and balance by PFC & REC), which will be entitled to purchase loans
(which are likely to be restructured) of the banks, subject to certain conditions.
o These conditions include a) banks to negotiate with the state government/utility for revised payment schedule and
b) state government to agree upon regular tariff increase, operational plan to meet certain technical/ operational
performance parameters and implementation of capital expenditure for system improvement as a first priority.
o RBI would provide a line of credit to SPV for purchase of loans from the banks. In case of non-compliance of terms
set by SPV, the state government undertaking should be available to RBI that the amount defaulted would be
debited to the State Governments Account with RBI. Thus, intentional default or non-adherence to the action
plan would be unlikely.
Recommendations on the process of tariff determination are reiterated as per the directives of ATEs judgement
In addition to basic tariff (which is fixed taking into account of targeted loss levels by SERCs), a loss surcharge should also be
levied which can vary area-wise within the license area so as to bring consumer awareness and improve the accountability of
the utilitys staff.
Selection committee for SERC should be broad based so as to make the selection process fair, objective and independent.
Committee
1
to be appointed for oversight of the functioning as well as periodic evaluation of the performance by the SERCs,
with a main objective to ensure the accountability of the regulators.
Distribution Franchisee Model would be the way forward on urgent basis for the utilities to bring down their distribution loss
levels significantly, this should be extended to the states during the next few years to at least 255 towns which seem to
account for over 40% of the consumption.
R-APDRP scheme is a key step taken by Central Government to reduce the distribution losses, and should be extended to the
next Plan period with applicability to all to towns above 30,000 populations based on Census 2011.
Utilities need to have in-house core team of IT experts in the organisation who can work with IT consultants appointed
under R-APDRP, as well as, there is a need of proper HRD department & of skilled professionals in the Finance department.


ICRA Equity Research Service Power Finance Corporation


7



Tariff revisions observed in many states during FY 2011-12, although with delays; more states adopt FPPCA
principles, though principles and implementation continue to vary

Several states have seen tariff revision during
the FY 2011-12 as seen in Chart 2. While this is
a positive, ICRA Online notes that bulk of these
tariff revisions (for FY 2011-12) happened well
after the due date which was March 31, 2011.
Further, in a number of states tariff/ARR
petitions for FY 2012-13 & true-up petitions
for FY 2010-11 (as per MYT regulatory
framework) are yet to be filed with SERCs,
whereas the same should have been filed by
November 30, 2011. There have also been
instances of roll-back of previous tariff-hike
during FY 2011-12 as observed in state of West
Bengal which led to adverse impact on the
financial & liquidity position of its distribution
utility, and such risk of regulatory uncertainty
cannot be ruled out in future for other states.
Also, the extent of tariff revision has been
varied, from as low as 0.4% to 24%, and is
inadequate to meet the actual cost of supply in
many states, thus resulting in large uncovered
revenue deficits, also termed as regulatory
assets. Such deficits remain unsustainable for
some of the discoms in states such as Tamil
Nadu, Rajasthan, Punjab, Haryana & Uttar Pradesh where recovery of such past dues or regulatory assets is expected
to happen over a prolonged period i.e. three to five years, so as to also avoid a tariff shock. Under such circumstances,
recent tariff hikes announced for the discoms by respective SERCs in Bihar (~12%) , (~ 37%) , Delhi (~26%), for FY
2012-13 remain key positives, which will further improve the cash flows of such discoms in the near term. However,
adequacy of tariff revision and periodicity on annual basis remains extremely critical for sustained improvement in
the financial performance of such discoms, going forward. Further, a number of major states such as Gujarat,
Maharashtra, AP, Rajasthan, Punjab, Haryana, West Bengal and Delhi have also put in place fuel price & power
purchase cost adjustments (FPPCA) although the implementation varies from state to state. With this, regular pass-
through of FPPCA in retail tariff (and in the case of agriculture consumption, through increased subsidy from the state
government) also remains very crucial for discoms from their credit/liquidity perspective.
Key initiatives for the Generation Sector
As regarding generation, the GoI has constituted a Committee of Secretaries (CoS) to work out a time bound action
plan to resolve issues with respect to fuel shortage, mismatches between fuel price and tariffs committed under
existing competitively bid tariffs and permitting risks (including environmental clearances and land acquisition).
Some of the key proposals which are being considered are as follows:

GoI to ensure fuel security for power projects. Key features:
Coal India to sign Fuel Supply Agreements(FSA) with power plants likely to be completed by
Mar 2015 , for projects completed by Dec 2011, FSAs to be signed by March 2012.

The FSAs will be signed for full quantity of coal mentioned in the Letters of Assurance (LoAs)
for a period of 20 years with trigger level of 80% for levy of disincentive and 90% for levy of
incentive, FSAs to be for full quantity for 20 years- penalty/incentive clauses applicable.
In case of shortfall in domestic coal availability, Coal India Limited will import coal, which
will be supplied to power producers albeit at the actual cost of such supplies.
ICRA Equity Research Service Power Finance Corporation


8



Independent Power Producers (IPPs )supplying power on cost plus basis or competitive bid
basis to be treated at par with public sector units in terms of prioritising future supplies.

GoI to address issue of mismatch between tariffs and cost of generation :
Competitive bidding guidelines to be modified new bidding guidelines to be announced
shortly.

GoI to speed up environmental and other bottlenecks hampering implementation of power plants
and coal blocks
While, ICRA Online believes that the aforementioned steps are a positive, some risks still remain. While obliging CIL to
meet commitments by importing coal if necessary will ensure fuel security this will result in increased cost of
generation for power projects. Secondly, while changes in competitive bidding norms- under which it is expected that
bidders will have to quote only capacity charges and station heat rates- may result in lower risks for plants which are
yet to have signed PPAs, it is unclear whether these guidelines will apply to projects which have already signed PPAs
at very low rates.

We estimate investment requirements for the generation segment alone during XII Plan period are expected to
remain at about Rs. 5,00,000 crore. With equivalent amount of investments requirements for Transmission &
Distribution (T&D) segment, overall investment potential thus remains high leading to large-sized debt funding
requirements of over Rs. 7,00,000 crore, assuming the normative funding mix (Debt: Equity at 70:30). At a 25%
market share, and assuming actual investments of 70% of total funding requirements, PFC would have opportunities
to disburse over Rs. 1,20,000 crore in the next 5 year plan (2012-17). (over and above the undisbursed sanctions of
Rs. 1,83,616 crore as on March 2012)

Table 1: Potential share of funding by PFC under the XIIth Five Year Plan
XII
th
plan estimate
Total potential debt funding requirement 7,04,900
Actual achievement 70%
Estimated requirement of debt 4,93,430
PFC market share 25%
PFC share of financing in XII th plan 1,23,358
Source: ICRA Online estimate
Amount in Rs. Crore


ICRA Equity Research Service Power Finance Corporation


9



Large undisbursed sanctions could help PFC maintain its growth trajectory in medium term
PFCs portfolio has registered a robust growth over the past few years on the back of significant investment demand in
the power industry. PFCs portfolio has expanded at a 5 year CAGR of 24% to Rs. 130209 crore as on March 31, 2012.
In addition to PFC, the lenders to the power sector include other specialized lending agencies and banks. As March 31
2012, as per an ICRA Online estimate, out of a total power sector credit of around Rs. 5,90,000 crore, PFCs portfolio
constituted an overall share of 22%. This share had been declining till FY2011, as during this period banks increased
their lending to the sector, however PFCs share increased in FY2012 from 21% to 22%. Further, a considerable
amount of the funding from banks has been working capital loans therefore PFCs market share in project






financing would be higher at around 25%. During March-2006 to March-2011, banks power sector exposure has
grown faster at 5 year CAGR of 35% (compared to PFCs 23% during the period), however growth slowed down to
22% in FY2012. Going forward the banking system may not be able to sustain their high pace of expansion in the
sector, as several banks are hitting their industry exposure limits. Therefore going forward PFC could be in a position
to maintain its market share.

Table 2: Profile of outstanding sanctions of PFC as on March 31, 2012










Source: PFC Investor Presentation March 2012
Amount in Rs. crore

Further, PFC had large un-disbursed sanctions aggregating to over Rs. 1,83,616 crore as on March 2012. Out of the
total undisbursed sanctions, around 47% (or Rs. 86,439 crore) are sanctions where disbursements have commenced,
while out of the balance, as per PFCs internal analysis, around 95% pertain to sanctions done over the past 3 years.
Against these outstanding sanctions, ICRA Online estimates that PFC would be in a position to grow its portfolio at
Documents executed
and & disbursement
commenced
Document executed
but disbursement
not commenced
Document
not executed
Total
outstanding
sanctions
State 60,415 22,630 46652 129,697
Central 3723 181 2,632 6,536
Joint 6,266 400 0 6,666
Private 13,580 13,026 14,109 40,715
Total
Sanctions
86,439 26,536 69,039 183,616
Chart 3: Growth in domestic credit to power sector Chart 4: Movement in market share of domestic funding to
Power Sector
Source: Company and ICRA Online Research, Amounts in s. 000 crore
-
100
200
300
400
500
600
700
0%
10%
20%
30%
40%
50%
60%
70%
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Total Credit to power sector (RHS) GrowthPFC Credit
Growth Banking Credit to Power sector Growth Total Credit to Power Sector
Growth Overall Credit Banking sector
28% 28%
26% 26%
23%
21% 22%
19% 20%
20% 20%
19%
17%
17%
5%
5%
6%
5%
5%
6%
5%
47% 47% 48%
49%
54%
56% 56%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
PFC REC IDFC Banks
ICRA Equity Research Service Power Finance Corporation


10



over 25% over the next three financial years, assuming full disbursement against sanctions where disbursement has
commenced, 75% disbursements where documents have been executed and 40% disbursement against sanctions
where disbursements are yet to commence. Over the longer term growth opportunities of PFC would continue to
remain healthy given the estimated PFC share of financing in the next 5 year plan of over Rs. 1,20,000 crore.

Competitive positioning supported by ability to take large exposures; however any future requirement to
comply with RBI exposure norms could restrict growth
As on March 31, 2012 PFC had a Net worth of Rs. 20,708 crore, which is amongst the largest within financial
institutions in India. PFCs large net worth has enabled it in the past to take large exposures on projects, which has
supported its competitive positioning. Furthermore within the state power sector PFC has permission from RBI to
formulate its own exposure norms; accordingly PFC can lend upto 150% of its net worth to a single state sector utility,
against upto 25% of capital funds (Tier 1 and Tier 2) for banks. Although in the case of private sector exposures PFC
does adopt the RBIs exposure norms
8
, its large net worth and corresponding ability to take large exposures would
continue to benefit its growth prospects given GoIs focus on meeting power generation targets by encouraging
private sector promoted ultra mega power projects, which would require large single party funding requirements.

However growth of PFC could get constrained under the circumstance that it be required to adopt RBIs exposure
norms on its state sector lending. Under such a scenario PFC would need to bring down its exposures to certain states
and would constrain its ability to take incremental exposures. However given the current paucity of funding available
to sustain the proposed investment in the power sector PFC could continue to be allowed more liberal lending norms.

New Businesses Planned
While in the past PFC has primarily financed generation projects (84% of total portfolio), the corporation over the
medium term plans to diversify into new segments including projects with backward linkages to the power sector
(power equipment manufacturers, mining, gas pipe lines etc) and promoter equity financing. Furthermore PFC in the
current financial has setup a 100% subsidiary PFC Green Energy Private Limited in order to streamline the focus on
tapping the growth potential in renewable energy segment; through this vertical PFC intends to focus on small hydro
generation, solar and wind power generation projects. PFC enjoys strong relationships and knowledge of assessing
projects in the power sector which it should be in a position to leverage as it attempts to expand the scope of its
lending operations.


Rising share in the private sector exposures
Chart 5 Expected Sector wise Portfolio Mix
As on March 31, 2012 PFCs exposure to IPPs
accounted for 11% of its total advances.
Based on ICRA Online estimates, the share of
portfolio towards IPPs could increase to close
to 20% over the next 3 financial years while
to around 30% of the total portfolio over the
long term. While the increase in proportion of
exposures to the IPP segment would increase
yield on portfolio (as yields for IPPs are
higher to yields on state level entities by 50-
75 bps); at the same time the risk profile of
PFC could increase given the current
challenges in operating environment. Out of
PFCs total private sector exposure of Rs.
14737 crore as on March 31, 2012 Coal based
IPPs have the maximum contribution of 66%,
followed by Gas based IPPs at 12%, Hydro
power based IPPs at 10%. Renewable power

8
In the case of NBFC- Infrastructure Finance Company (IFC), the maximum single party exposure is to be restricted to 25% of net
owned funds and in the case group exposures restricted to 40% of net owned funds,
0%
5%
10%
15%
20%
25%
30%
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
Mar-09 Mar-10 Mar-11 Mar-12(e) Mar-13(e) Mar-14(e)
Private Sector State/Central/Joint Sector
Growth in Portfolio Proportion of Private Sector Exposure
ICRA Equity Research Service Power Finance Corporation


11



based IPPs and others being 12%. However, if we were to include the partially disbursed amounts (likely
disbursement going forward) going forward the share of thermal power IPPs could increase to around 77% over the
next three years.




Source: Company and ICRA Online Research

The IPPs would be subject to the following risks

Fuel Supply Risks- Based on a weighted average
9
analysis of PFCs outstanding exposure in Thermal IPPs, close to
67% of this exposure is dependent on the domestic coal. Domestic coal based capacities, largely based on output from
Coal India Limited (CIL) and its subsidiaries are likely to be subject to significant fuel supply risks arising out of
significant shortages that are expected in the near foreseeable future. However, recent initiatives taken by the
government are likely to reduce the risks

Power Purchase Agreement (PPA) related Risk- Based on a weighted average
3
analysis of PFCs exposure in
Thermal IPPs, around 68% of this exposure is based on competitively bid based PPAs. In a domestic coal deficit
situation, rising dependence on coal imports would keep a significant upward pressure on the cost of power
generation. This is likely to adversely affect the project economics of competitively bid based PPAs essentially due to
under recoveries of the actual fuel costs.

Merchant tariff volatility risks- Based on a weighted average
3
analysis of PFCs exposure in Coal Based IPPs close to
14% of PFCs exposure is under merchant sales wherein either there is a short-term PPA or it is untied, thereby
exposing it to any adverse volatility in the merchant tariffs.

Counter Party risks- Overall the operating and financial position of state-owned distribution companies continues to
remain weak. High aggregate book losses for key states, exposes the IPPs to significant counter-party credit risks.


9
Weighted averages are based on the outstanding amount and the amount yet to be disbursed in partially disbursed cases
Chart 6: Profile of existing private sector exposure (in terms
of amount outstanding as on 31
st
March 2012)
Chart 7: Expected Profile of Private Sector Portfolio assuming full disbursal in
partially disbursed sanctions as on 31
st
March 2012
Coal Based
66%
Gas Based
12%
Hydel
10%
Wind , Solar ,
Bio Mass and
others
12%
Hydel IPP
7%
Gas Based IPP
7%
Wind Solar and Bio Mass
IPP
7%
Domestic Coal
67%
ImportedCoal
17%
Domestic Captive
Coal 16%
Coal Based IPP
77%
ICRA Equity Research Service Power Finance Corporation


12



Chart 8: Outstanding exposure to projects under moratorium
Portfolio
where
Repayments
has started
44%
Portfolio
where
Repayments
have not
started
56%
Further, Hydro power based IPPs contribute close to 14% of the PFCs total exposure to the private sector. Most of
these projects are at a relatively early stage of implementation which exposes these projects to significant project
execution risks. PFCs hydro IPP portfolio includes an exposure to Shri Maheshwar Hydel Power Project, in Madhya
Pradesh which slipped into NPA category as on March 31, 2012


Good asset quality so far, however lack of policy action could trigger restructuring / higher NPAs

Table 3: NPA movement of PFC
Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Gross NPA 13 13 13 231 1358
Net NPA 7 6 6 195 1215
Gross NPA (%) 0.03% 0.02% 0.02% 0.23% 1.04%
Net NPA (%) 0.01% 0.01% 0.01% 0.20% 0.93%
Source: Company and ICRA Online Research, Amount in Rs. Crore

PFC has observed some slippages in the current financial year and the Gross NPA% increased from 0.23% as on Mar-
2011 to 1.04% as on March 31, 2012 primarily on account of slippages in Shri Maheshwar Hydel Power Project and
Konaseema Gas Power. While reported asset quality indicators of PFC remain lower than banks, ICRA Online, notes
the substantial proportion of PFCs outstanding
portfolio is under moratorium (where principal
servicing is yet to commence). Given the
concerns with respect to shortages of domestic
coal availability and the deterioration in health
of state power utilities thereby increasing
counter party risks on generating companies,
there could be some slippages in the medium
term. Despite these challenges PFC could still
continue to maintain low NPAs because of the
following:

Default escrow mechanism
Possibility of restructuring
Different NPA recognition norms
10
for
state government guaranteed exposures

Further Despite such possible deterioration in collections over medium term, eventual losses from State Govt
entities could remain low.


10
A facility which is backed by the Central/State Government guarantee or by the State Government undertaking for deduction from
central plan allocation or a loan to State department , would remain standard for a period not exceeding 12 months from the date from
which Companys dues have not been paid by the borrower.

ICRA Equity Research Service Power Finance Corporation


13



FINANCIAL OUTLOOK

Diversified resource profile
Table 4: Borrowing Mix for PFC
Mar-09 Mar-10 Mar-11 Mar-12
Bonds 35,479 68%

45,801 68% 56,137 66% 74299 74%
Foreign Currency Loans 2,590 5%

2,759 4% 4,963 6% 5969 6%
Term Loans from Banks/ LIC 12,692 24%

16,223 24% 18,208 21% 15345 15%
Short Term Borrowings 1,400 3%

2,325 3% 6,291 7% 4308 4%
Total 52,160 100% 67,108 100% 85,599 100% 99,920 100%
Cost of funds 9.25% 7.99% 8.23% 8.63%
Cost of funds (excluding foreign
currency translation gains/losses
8.72% 8.16% 8.20% 8.46%
Source: PFC and ICRA Online Research
Amount in Rs. Crore

PFC enjoys a strong financial flexibility and raises long term funds at competitive rates. PFC largely raises funds from
the financial market through issuance of long term debentures, which accounted for 74% of total borrowings of the
corporation as on March 31, 2012. Given its sovereign ownership, its highest credit quality ratings and the strong
relationship it enjoys amongst financial institutions, PFC enjoys funding at competitive rates. During FY2012,PFC
raised Rs. 33000 crore(approx) of bonds at weighted average incremental cost of around 9.30%. Besides long term
bonds, PFC has in the past tapped the banking system for funding and has been raising funding through this channel at
base rate. Further, PFC raised Rs 5000 crore through tax free bonds in January 2012 at 8.30% crore in 2011-12, which
would support the corporation in maintaining its competitive funding profile.



In the current financial year the increasing
interest rate scenario has led to an increase in
cost of funds of PFC. However PFC as an
Infrastructure Finance Company (IFC), is
permitted to raise low cost External Commercial
Borrowings (ECBs) upto 50% of its net worth
through the automatic route. PFC in the past has
left a substantial portion of its foreign currency
borrowings un-hedged for currency variations,
which exposes it earnings profile to exchange rate
risks. However a bulk of such borrowings has
longer tenures (around 85% mature after March
2015), which mitigates the risk to an extent.
Chart 9: Quarterly movement of PFCs incremental cost on long
term bonds viz.a.viz. 10 year benchmark G-sec
Source : Company and ICRA Online Research

0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q12012 Q22012 Q32012 Q42012
PFC's Incremental cost of long tem bonds 10 year benchmark G-Sec
ICRA Equity Research Service Power Finance Corporation


14



Although PFC has a good standing to raise funding from institutional investors at market competitive rates, PFC does
remain at a disadvantage viz.a.viz. banks without access to funding through low cost Current and Savings
Account(CASA deposits). However, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements for
banks reduce the disadvantage to some extent. Besides banks, Rural Electrification Corporation (REC) is a close
competitor to PFC; historically REC has enjoyed lower funding costs than that of PFC with permission from GoI to
raise low cost Capital Gains Bonds (54 EC bonds). However the gap between cost of funding for both corporations has
been narrowing over the past few years as the share of funding through Capital gains bonds for REC has been
declining. On an incremental basis both PFC and REC are able to tap wholesale funding (excluding Capital gains
bonds) at similar rates on the back of their sovereign ownership and highest credit ratings.

Low operating expenses support competitive positioning



Source : Company and ICRA Online Research

Notwithstanding the higher funding costs, competitive positioning of PFC is supported by its low operating expense
level, on the back of the wholesale nature of its lending business and lean operations. Operating expense level of PFC
is amongst the lowest in the industry and after adjusting the same for cost of funding, PFC cost of lending
11
converges
close to that of banks. Given the lower operating expenses and higher yielding portfolio, both PFC and REC, enjoy
higher Net Interest Margins (NIMs) viz.a.viz banks. However RECs, NIM Operating Expenses, remain higher than
that of PFC on account of its lower cost of funds.


11
(Interest Expenses + Operating expenses) /Average Borrowings
Chart 10: Cost of funds Chart 11: Operating Expenses by Average Total Assets
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
FY2008 FY2009 FY2010 FY2011 FY2012
PFC REC PSU Banks Private Banks
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
FY2008 FY2009 FY2010 FY2011 FY2012
PFC REC PSU Banks Private Banks
ICRA Equity Research Service Power Finance Corporation


15






Source : Company and ICRA Online Research

Stable earnings profile supported by low operating expenses and credit provisioning

Table 5 Key Financial Ratios
Mar-12 Mar-13e Mar-14e
Gross Interest Spreads 2.24% 2.45% 2.43%
NIM 3.53% 3.70% 3.53%
Other Income/ ATA 0.12% 0.14% 0.12%
Operating Expenses / ATA 0.11% 0.10% 0.09%
Operating Profit/ATA 3.54% 3.73% 3.56%
Provisioning / ATA 0.12% 0.16% 0.06%
ROA 2.52% 2.63% 2.59%
ROE 16.89% 18.33% 19.80%
EPS 22.97 30.96 38.81

PAT 3,032 4,087 5,123
Net worth 20,708 23,874 27,856
Gross NPA% 1.04% 1.08% 1.17%
Net NPA% 0.93% 0.85% 0.94%
Net NPA/Net Worth 5.87% 5.98% 7.06%
Advances 130,072 167,793 209,741
ATA: Average Total Assets, e ICRA online estimates
Source: PFC Annual accounts and ICRA Online Research

Earnings profile of PFC has in the past been supported by its healthy interest spreads, low operating expenses and low
credit provisions. We expect increase in share of private sector exposures (where yields are higher by 75-100 bps) to
increase the overall yield on portfolio. Further a large proportion of PFCs exposures would get repriced over the next
4 quarters which would move the yields upwards and lead to improvement in interest spreads to around 2.50% in
Chart 12: Cost of lending Chart 13: Net Interest Margins less Operating Expenses
6.00%
6.50%
7.00%
7.50%
8.00%
8.50%
9.00%
9.50%
10.00%
FY2008 FY2009 FY2010 FY2011 FY2012
PFC REC PSU Banks Private Banks
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
FY2008 FY2009 FY2010 FY2011 FY2012
PFC REC PSU Banks Private Banks
ICRA Equity Research Service Power Finance Corporation


16



FY2013 and 2.54% in FY2014. Net Interest Margins (NIMs) of PFC are also expected to improve inline with
improvement in interest spreads. Operating expenses in relation to asset base of PFC are likely to remain in line with
previous year levels of 0.10%, which would lead to improvement in operating profitability of PFC in FY2013. Credit
provisions are likely to increase going forward. However, PFC with its larger capital base is well poised to take
advantage of the robust growth opportunities offered in the power sector. ICRA Online expects PFC to maintain a
return on equity of around 18-19% over the medium term.



In line with the NIM Operating expense, both PFC and REC enjoy higher Return of Assets than Banks. RECs
profitability indicators are superior to PFC owing to higher Net Interest Margins.

Fee income expected to increase from present levels
PFC is the nodal agency to operationalise the Restructured Accelerated Power Development and Reforms Programme
(R-APDRP) launched by GoI with a focus on reducing AT&C losses. The government outlay under this programme is
Rs.51,577 crore, and PFC has been appointed as an appraising agent for such projects, for which it receives a fee of 1%
of all sanctions (booked in 3 tranches, 0.3% for sanction, 0.3% for disbursement and 0.4% for monitoring) besides
receiving re-imbursements of operating expenses. This translates into a total fee income potential of ~ Rs. 875 crore
for PFC, out of which the corporation booked income of Rs. 89.62 crore in 2010-11 and Rs. 39.15 crore in FY2012.
While the current scheme is applicable to projects in towns with population of over 30,000 (10,000 in the case of
Special Category States), going forward proposals by the GoI to bring down this population eligibility would further
enhance the scope for PFC to earn fee income.

In addition to the R-APDRP scheme. PFC is also designated as the nodal agency by GoI to facilitate the development
and construction of UMPPs in India, i.e. Ultra Mega Power Projects with a contracted capacity of 3,500 MW or higher.
PFC has identified projects for 16 such UMPPs and accordingly12 SPVs in the form of wholly owned subsidiaries of
PFC have been incorporated to undertake preliminary site investigation activities necessary for preparation of project
information reports, and obtain applicable linkages, clearances and approvals required for conducting a tariff based
competitive bidding process for selection of developers for the UMPPs. Upon transfer to a developer PFC charges a
fee of Rs. 50 cr (against Rs. 15 crores in the past) and claims re-imbursements of expenses from the developer.
PFC is also looking to leverage its strong expertise of the power sector to expand its fee based services to include
project advisory services and debt syndication of power sector projects. In light of PFCs established presence in the
power sector ICRA Online expects PFC overall earnings to be supported by healthy fee income growth.




Chart 15: Movement of Return on Equity Chart 14: Movement of Return on Assets
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
FY2008 FY2009 FY2010 FY2011 FY2012
PFC REC PSU Banks Private Banks
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
FY2008 FY2009 FY2010 FY2011 FY2012
PFC REC PSU Banks Private Banks
ICRA Equity Research Service Power Finance Corporation


17



OTHER SUBSIDIARIES AND ASSOCIATES
PFC Green Energy Limited (PFCGEL)
PFCGEL is a wholly owned subsidiary of our Company. PFCGEL was incorporated on March 30, 2011. Through this
entity PFC intends to streamline its focus in the emerging renewable energy segment- the company is expected to
focus on small hydro, solar and wind generation projects

PFC Consulting Limited (PFCCL)
PFCCL is a wholly owned subsidiary of PFC and was incorporated on March 25, 2008. Through this entity PFC offers
project advisory services to power sector entities


GOVERNANCE STRUCTURE
PFC is managed by a 10 member Board, which includes five independent directors, one Government Nominee
Director and 4 Functional Executive Directors (including the Chairman). GoI holds a 73.72% stake in the corporation
and the rest is widely held and includes institutional investors. The disclosures in PFC Annual Report are adequate
and have been broadly in line with that followed by the industry.
ICRA Equity Research Service Power Finance Corporation


18



0
100
200
300
400
500
600
700
M
a
r
-
0
7
J
u
n
-
0
7
S
e
p
-
0
7
D
e
c
-
0
7
M
a
r
-
0
8
J
u
n
-
0
8
S
e
p
-
0
8
D
e
c
-
0
8
M
a
r
-
0
9
J
u
n
-
0
9
S
e
p
-
0
9
D
e
c
-
0
9
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
J
u
n
-
1
2
R
s
.

/

s
h
a
r
e
Stock Price PB - 1x PB - 2x PB - 3x
VALUATION GRADING

In assessing a company's valuation, various parameters are looked at including the company's earnings and growth
prospects; its ability to generate free cash flows and its capacity to generate returns from the capital invested. The
valuation is also benchmarked against an appropriate peer set or index. The opinion on a company's relative valuation
is expressed using the following five-point scale as follows:

Exhibit 1: ICRA Equity Research ServiceValuation Grades
While assessing a company's relative
valuation, the historical price volatility
exhibited by the stock, besides its liquidity, is
also taken into account. The extent of
overvaluation or undervaluation is adjusted
for the relative volatility displayed by the
stock.

Valuations - Historical Comparison
PFC has historically traded in a band of 1X to 3X on the 12 months forward P/B basis and in a 5X to 15X band on
forward P/E basis, mainly. As shown below, the valuation multiples of the company are currently trading at the lower
end of its long term average at 0.95 forward P/B multiple and at a 5.43 forward P/E multiple. Systemic concerns with
respect to the overall deteriorating financial health of PFCs main customers i.e state power utilities, project delays
and fuel linkages , have contributed to the overall reduction in valuation multiples of the sector as well as PFC.



Source: Bloomberg, ICRA Online Estimates





Valuation Grade Grade Implication
A
Significantly Undervalued
B
Moderately Undervalued
C
Fairly Valued
D
Moderately Overvalued
E
Significantly Overvalued
Chart 16: Forward P/B Band Chart 17: Forward P/E Band
0
100
200
300
400
500
600
700
M
a
r
-
0
7
J
u
n
-
0
7
S
e
p
-
0
7
D
e
c
-
0
7
M
a
r
-
0
8
J
u
n
-
0
8
S
e
p
-
0
8
D
e
c
-
0
8
M
a
r
-
0
9
J
u
n
-
0
9
S
e
p
-
0
9
D
e
c
-
0
9
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
J
u
n
-
1
2
R
s
.
/

s
h
a
r
e
Stock Price PE - 5x PE - 10x PE - 15x PE - 20x
ICRA Equity Research Service Power Finance Corporation


19



Relative Valuations Index and Peer Comparison



Source: Bloomberg, ICRA Online Estimates

While historically PFC had traded at a similar 12 month forward P/B ratio as the Bank Nifty Index, as already
discussed PFCs has been trading at a significant discount with the indexes. However, going forward considering the
robust EPS growth expectations for the corporation, we expect the forward P/E ratio for the company to improve
further going forward.


Table 6: Relative Valuations Vs Equity Indices:

PFC NIFTY INDEX* BANK NIFTY* CNX PSU BANK
INDEX*
FY13e FY14e FY13e FY14e FY13e FY14e FY13e FY14e
Price/Earnings 4.61 3.97 11.51 10.70 9.42 9.35 5.34 4.72
Price /Book
Value
0.85 0.72 1.90 1.73 1.51 1.44 0.87 0.77




* Bloomberg Consensus as on July 5, 2012

Chart 18: Index Comparison: Forward P/B
Ratios
Chart 19: Index Comparison: Forward P/E Ratios
Source: Bloomberg and ICRA Online Estimates

0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
NSE S&P CNX NIFTY INDEX BANK NIFTY INDEX CNX PSU BANK INDEX PFC
0
5
10
15
20
25
30
M
a
r
-
0
7
J
u
n
-
0
7
S
e
p
-
0
7
D
e
c
-
0
7
M
a
r
-
0
8
J
u
n
-
0
8
S
e
p
-
0
8
D
e
c
-
0
8
M
a
r
-
0
9
J
u
n
-
0
9
S
e
p
-
0
9
D
e
c
-
0
9
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
J
u
n
-
1
2
NSE S&P CNX NIFTY INDEX BANK NIFTY INDEX CNX PSU BANK INDEX PFC
ICRA Equity Research Service Power Finance Corporation


20



Relative Valuations Peer Comparison




PFCs closest competitor, REC is also a state sponsored specialized lender to the sector. While both PFC and REC have
been trading at a discount to the industry peers and index, P/B multiple for REC and PFC are similar as both
companies are evenly poised to leverage the strong growth opportunities offered in the power sector.

Table 7: Relative Valuations Vs Peer Valuations:
PFC REC* IDFC* PNB* BOB*

FY13e FY14e FY13e FY14e FY13e FY14e FY13e FY14e FY13e FY14e
Price/Earnings
4.61 3.97 5.11 4.40 9.60 8.12 4.81 3.76 4.91 4.31
Price /Book Value
0.85 0.72 0.89 0.76 1.40 1.26 0.78 0.64 0.85 0.73


Source: Bloomberg, ICRA Online Estimates
* Bloomberg Consensus Estimates as on Jjuly 5, 2012
Chart 20: Peer Comparison: Forward P/B Ratios Chart 21: Peer Comparison: Forward P/E Ratios
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
PFC REC IDFC BOB PNB
0
5
10
15
20
25
30
35
40
PFC REC IDFC BOB PNB
ICRA Equity Research Service Power Finance Corporation


21



Annexure 1 COMPANY PROFILE

PFC is a specialized Development Financial Institution, which was set up in 1986 with the objective of funding projects
in the domestic power sector. PFC provides loans for a range of activities from generation to distribution,
transmission, renovation and maintenance and other related activities. PFC finances state sector entities such as State
Electricity Boards (SEBs) and State Generating Companies (SGCs) and Independent Power Producers (IPPs). In
addition, PFC has been appointed as the nodal agency to develop sixteen Ultra Mega Power Projects (UMPPs).

Exhibit 2: Company Factsheet
Name of the Company Power Finance Corporation (PFC)
Year of Incorporation
July 1986

Corporate Status Public Limited Company
Registered Office Urjanidhi, 1 Barakhamba Lane
New Delhi - 110 001


Nature of Businesses Development Finance Institutuion for financing power sector including power
generation, transmission, distribution, grid strengthening, renovation and
maintenance, sector studies etc



Auditors M/S N K Bhargava and Co and Ms Raj Har Gopal and Co
Board of Directors
Mr. Satnam Singh Chairman and Managing Director
Mr. M K Goel Director(Commercial)
Mr. R Nagarajan- Director ( Finance)
Mr. Devendra Singh Government Nominee Director
Mr. P Murali Mohana Rao Independent Director
Prof Ravindra H Dholakia Independent Director
Mr. S C Gupta Independent Director
Mr. Ajit Prasad Independent Director
Mr. Krishna Mohan Sahni Independent Director


Key subsidiaries
PFC Consulting Limited, PFC Green Energy Limited, PFC Capital Advisory Services
Limited
Key Joint Ventures National Power Exchange Limited, ,Energy Efficiency Services Limited


ICRA Equity Research Service Power Finance Corporation


22




Annexure 3: PFC PORTFOLIO MIX

Weak financial health of State electricity boards is a concern; however limited exposure to more vulnerable
distribution companies, government guarantees and default escrow have served as risk mitigants

While liberal state sector lending norms have enabled PFC to expand, the corporation is exposed to concentration
risks, with exposures to state power utilities in 5 states accounting for 40% of total advances. PFC, given its position
as a major financier of state power sector utilities, as well as its close association with the Ministry of Power (MoP) as
a routing agency for its power development programmes has in the past maintained a good track record over
recoveries from such financially weak state power utilities; however the continued deterioration in financial health of
such entities is a concern. Factors such as slow pace of reforms and loss reduction coupled with increasing cost of
supplies without commensurate increase in tariffs have led to large and increasing cash losses for state power
utilities.

Table 8: Sector-wise credit portfolio of PFC

Mar-09 Mar-10 Mar-11 Mar-12
State sector 46,443 54,142 64,509 81480
Central Sector 9,283 15,015 20,300 24691
Joint Sector 4,360 6,525 7,991 9302
Private Sector 4,335 4,179 6,801 14737
Total 64,421 79,861 99,601 130,209
Growth in credit
portfolio
25% 24% 25% 31%
As % of Total
State Sector 72% 68% 65% 63%
Central Sector 14% 19% 20% 19%
Joint Sector 7% 8% 8% 7%
Private Sector 7% 5% 7% 11%
Source : Company
Amount in Rs. crore
As on March 31, 2012 PFCs exposure to state utilities companies accounted for 63% of its total portfolio..

Table 9 : Segment-wise credit portfolio of PFC
Mar-09 % Mar-10 % Mar-11 % Mar-12 %
Generation 52,345 81% 67,013 84% 84,294 84% 107,426 83%
Distribution 6,494 10% 6,284 8% 4,701 5% 5,667 4%
Transmission 3,410 5% 3,402 4% 7,596 8% 9,922 8%
Others 2,172 3% 3,163 4% 3,010 3% 7,195 6%
Total credit portfolio 64,421 79,862 99,601 130,209
Source : Company
Amount in Rs. crore

Based on an ICRA Online assessment on the financial health of power sector utilities in various states, it is estimated
that around 31% of PFCs total portfolio (as on March 2012 was deployed in states with relatively financially weak
power sector utilities. PFC in the past had taken state government guarantees on a part of its exposures to state power
utilities, and after adjusting for these, PFCs total unguaranteed exposure to weaker state power utilities accounts for
around 22% of its total portfolio as on March 2012.
ICRA Equity Research Service Power Finance Corporation


23




Table 10: State-wise outstanding credit portfolio and state government guarantees of PFC
State Portfolio as
on March
31, 2012
% of
total
portfolio
Of which
Govt.
guaranteed
Un guaranteed exposures as % of total portfolio
Generation Distribution Transmission Total
Rajasthan 12,729 10% 2066 8% 0% 0% 8%
Uttar Pradesh 9,134 7% 6261 0% 1% 0% 2%
Tamil Nadu 6,075 5% 556 4% 0% 0% 4%
Madhya Pradesh 7,067 5% 1954 3% 0% 0% 4%
Punjab 597 0% 347 0% 0% 0% 0%
Bihar 178 0% 0 0% 0% 0% 0%
Haryana 4,648 4% 66 3% 0% 0% 4%
Exposure to states
with weaker
power utilities
40,428 31% 11249 17% 2% 1% 22%

Maharashtra 12,167 9% 729 4% 2% 3% 9%
Andhra Pradesh 9,729 7% 510 6% 1% 0% 7%
Chattisgarh 6,563 5% 0 4% 1% 0% 5%
Others 12,592 10% 3030 6% 1% 0% 7%
Total State Utility 81,480 63% 15519 38% 6% 4% 51%
Source: Company
Amount in Rs. crore

As on March 2012 around 19% of total state power utility exposures (or 12% of total portfolio) of PFC were backed by
state government guarantees. Owing to fiscal consolidation by state governments over the past few years, the share of
PFCs state power utility exposures covered by guarantees has been progressively declining and going forward the
share of portfolio covered under the same likely to come down further. However in the past PFC has not relied on
enforcement of state government guarantees to recover dues and has been able to enforce regular collections by
insisting on default escrows on utility receivables and by taking a charge on the utilitys fixed assets.



ICRA Equity Research Service Power Finance Corporation


24



ANNEXURE 4 Projections

For The Year Ended 31.03.2012 31.03.2013 31.03.2014
Actuals Projections Projections
Total Interest Income 12,716 17,217 21,730
Total Other Income 140 214 246
Total Income 12,856 17,431 21,977


Total Interest Expended 8,480 11,465 14,759
Net Interest Income 4,236 5,752 6,972
Other Expenses:

Employee Expenses 72 86 104
Administrative Expenses 57 68 80
Total Other Expenditure 129 154 184


Total Expenditure 8,610 11,619 14,943


Operating Profits 4,246 5,812 7,034
Forex Losses

38 38
Provisions And Contingencies 143 242 113
PBT 4,104 5,533 6,884
Tax 1,073 1,446 1,799
PAT 3,032 4,087 5,123
Dividend 920 920 966
EPS 23 31 39
BV Per Share 157 181 211




ICRA Equity Research Service Power Finance Corporation


25





ASSETS 31.03.2012 31.03.2013 31.03.2014
Actuals Projections Projections

TOTAL LOANS AND ADVANCES 1,30,072 1,67,793 2,09,741
TOTAL INVESTMENTS 59 77 77
Cash in Hand 1,988 3,356 4,195
NET FIXED ASSETS 76 84 93
TOTAL OTHER ASSETS 3,379 4,359 5,449
TOTAL ASSETS 1,35,575

1,75,669 2,19,554

LIABILITIES 31.03.2012 31.03.2013 31.03.2014
Actuals Projections Projections
Equity Share Capital 1320 1320 1320
NET WORTH (REPORTED) 20708 23874 27856
Interest subsidy fund from GoI 376 301 226
TOTAL Long Term BORROWINGS 106,055 141,440 179,625
Total Short Term Borrowings 4071 5252 6565
TOTAL OTHER LIABILITIES 4365 4802 5282
TOTAL LIABILITIES 135,575 175,669 219,554




ICRA Equity Research Service Power Finance Corporation


26



KEY FINANCIAL RATIOS


Actuals Projected Projected
YEAR ENDED 31.03.2012 31.03.2013 31.03.2014
Yield on Average Advances 11.03% 11.54% 11.50%
Yield on Average Funds 10.86% 11.35% 11.28%
Cost of Average Funds 8.63% 8.90% 8.85%
Gross Interest Spread 2.24% 2.45% 2.43%

Interest Earned / Average Total Assets 10.59% 11.06% 11.00%
Interest Paid / Average Total Assets 7.06% 7.37% 7.47%
Net Interest Margin/ Average Total Assets 3.53% 3.70% 3.53%
Non Interest Income/ Average Total Assets 0.12% 0.14% 0.12%

Operating Expenses/Avg Total Assets 0.11% 0.10% 0.09%
Expenses(incl Provisions and Contingencies/Average Total
Assets 0.23% 0.25% 0.15%
Non Interest Income/Non Interest Expenses 107.93% 139.07% 134.26%

Operating Profit / Average Total Assets 3.54% 3.73% 3.56%
Forex losses/ Average Total Assets 0.02% 0.02%
Profit Before Tax(PBT)/ Average Total Assets 3.42% 3.58% 3.50%
Profit After Tax (PAT) / Average Total Assets 2.52% 2.63% 2.59%
Dividend / PAT 30.36% 22.52% 18.87%
PAT / Networth 16.89% 18.33% 19.80%
PAT-Dividend/ Average Total Assets 1.76% 2.03% 2.10%

CAPITALISATION RATIOS
Total Debt / Networth 5.32 6.14 6.68
Long Term Debt / Networth 5.32 6.14 6.68
Capital Adequacy Ratio 16.29% 15.98% 14.39%
Net NPAs/Networth 5.87% 5.98% 7.06%





ICRA Equity Research Service Power Finance Corporation


27



Annexure 5 : Key Coal based IPP exposures outstanding as on March 31, 2012
Name of the IPP Outstanding
as on Jun-11

Fuel Source mix (%) Power off-take (% of total Power
capacity)
Domestic Import Captive Under
Case I
and Case
II
12

bidding
Under Captive
Sale, ROFR
13

Sale and Sale
to SEBs with
cost pass
through
Under
Merchant
Sale
Udupi Power Corp, Karnataka 512 - 100% - 90% 10%
Lanco Power, Unit 1 & 2, Chattisgarh 448 100% - - 100% - -
Lanco Power, Unit 3, Chattisgarh 363 79% 21% - 35% 35%# 25%
Jhajjar Power, Haryana 327 100% - - 100% - -
Ind Bharat Energy, Orissa 325 83% 17% - 63% 12%^ 30%
Sasan Power, Singrauli 286 - - 100% 100% - 0%
East Coast Energy Pvt. Ltd, AP 227 60% 40% - 75% - 25%
RKM Powergen, 1080 MW , Chattisgarh 217 - - 100% 82% 18% -
Indiabulls Realtech, Maharashtra 163 83% 17% - 75% - 25%
RKM Powergen, 350 MW , Chattisgarh 155 100% - - 100%
Indian metals and Ferro Alloys, Orissa 154 - - 100% - 60% -
Essar Power, MP 789 100% - - - 100%* -
India Bulls Power, Maharashtra 103 80% 20% - 75% - 25%
Thermal Powertech Corp, AP 103 93% 7% - 75% - 25%
KVK Nilanchal, Orissa 84 78% 22% - 50% 25%#
Sub Total 3579
Total Thermal IPP 4406

(Amount in Rs. Crore)
*PPA with Govt. Of MP is in place for 12.5% out of total ROFR for 37.5% (including 7.5% of the power to be supplied at
variable cost)
^ to be sold on variable cost
#includes 5% of the power capacity to be supplied at variable cost

12 In case of Case I bidding the entire onus of land acquisition, seeking water approvals, getting environment clearances and fuel
tie-up is on the project developer. In case of Case II bidding onus of land acquisition, seeking water approvals, and getting
environment clearances is on the power procurer and the fuel tie up is arranged either by the procurer or the bidder.
13 Right of First Refusal under the MOUs (on cost plus basis) with the respective state governments

ICRA Equity Research Service Power Finance Corporation


28



Annexure 6: Key Non Coal based IPP exposures outstanding as on March 31, 2012
Name of the IPP Category Amount outstanding
Suzlon Energy Limited Wind Based 954
Shri Maheshwar Hydel Power Project Hydro Based 700
Torrent Power Generation Gas Based 373
Konaseema Gas Power Gas Based 388
Vadinar Power Company Gas Based 870
R S India Wind Based 228
Dans Energy Hydro Based 220
Jal Power Corporation Limited Hydro Based 164
Sub Total 3895


Source: Company and ICRA Online Research
Amount in Rs. Crore

ICRA Equity Research Service Power Finance Corporation


29



Annexure 7: PFCs competitive positioning viz.a.viz. banks

PFC Banks
Funding Mix PFC is allowed to raise infrastructure bonds, tax free
bonds and can borrow upto 50% of net worth
through ECBs.
Does not have access to deposits


At an advantage with access to low cost
CASA
14
deposit funding.
CRR/SLR
norms Not Applicable
CRR
15
-4.75% of NDTL
SLR
16
-24% of NDTL
Negative carry on these investments does
off-set the impact of low cost CASA deposit
base to an extent
Priority Sector
lending targets
Not Applicable 40% of ANBC
17
, at a disadvantage as the
portfolio is lower yielding
Source : ICRA Online Research


14 Current Account Savings Account
15 Cash Reserve Ratio
16 Statutory Liquidity Ratio
17 Adjusted Net Bank Credit
ICRA Equity Research Service Power Finance Corporation


30




ICRA Limited

CORPORATE OFFICE
Building No. 8, 2nd Floor,
Tower A, DLF Cyber City, Phase II,
Gurgaon 122002
Ph: +91-124-4545300, 4545800
Fax; +91-124-4545350

REGISTERED OFFICE
1105, Kailash Building, 11
th
Floor,
26, Kasturba Gandhi Marg,
New Delhi 110 001
Tel: +91-11-23357940-50
Fax: +91-11-23357014
CHENNAI
Mr. Jayanta Chatterjee
Mobile: 9845022459
Mr. D. Vinod
Mobile: 9940648006
5th Floor, Karumuttu Centre,
498 Anna Salai, Nandanam,
Chennai-600035.
Tel: +91-44-45964300,
24340043/9659/8080
Fax:91-44-24343663
E-mail: jayantac@icraindia.com
d.vinod@icraindia.com

HYDERABAD
Mr. M.S.K. Aditya
Mobile: 9963253777
301, CONCOURSE, 3rd Floor,
No. 7-1-58, Ameerpet,
Hyderabad 500 016.
Tel: +91-40-23735061, 23737251
Fax: +91-40- 2373 5152
E-mail: adityamsk@icraindia.com


MUMBAI
Mr. L. Shivakumar
Mobile: 9821086490
3rd Floor, Electric Mansion,
Appasaheb Marathe Marg, Prabhadevi,
Mumbai - 400 025
Ph : +91-22-30470000,
24331046/53/62/74/86/87
Fax : +91-22-2433 1390
E-mail: shivakumar@icraindia.com

KOLKATA
Ms. Anuradha Ray
Mobile: 9831086462
A-10 & 11, 3rd Floor, FMC Fortuna,
234/ 3A, A.J.C. Bose Road,
Kolkata-700020.
Tel: +91-33-22876617/ 8839,
22800008, 22831411
Fax: +91-33-2287 0728
E-mail: anuradha@icraindia.com

PUNE
Mr. Sameer Mahajan
Mobile: 9881300772
5A, 5th Floor, Symphony,
S. No. 210, CTS 3202,
Range Hills Road, Shivajinagar,
Pune-411 020
Tel : +91- 20- 25561194,
25560195/196,
Fax : +91- 20- 2553 9231
E-mail: sameer.mahajan@icraindia.com

GURGAON
Mr. Vivek Mathur
Mobile: 9871221122
Building No. 8, 2nd Floor,
Tower A, DLF Cyber City, Phase II,
Gurgaon 122002
Ph: +91-124-4545300, 4545800
Fax; +91-124-4545350
E-mail: vivek@icraindia.com

AHMEDABAD
Mr. Animesh Bhabhalia
Mobile: 9824029432
907 & 908 Sakar -II, Ellisbridge,
Ahmedabad- 380006
Tel: +91-79-26585049/2008/5494,
Fax:+91-79- 2648 4924
E-mail: animesh@icraindia.com

BANGALORE
Mr. Jayanta Chatterjee
Mobile: 9845022459
'The Millenia', Tower B,
Unit No. 1004, 10th Floor,
Level 2, 12-14, 1 & 2, Murphy Road,
Bangalore - 560 008
Tel: +91-80-43326400,
Fax: +91-80-43326409
E-mail: jayantac@icraindia.com











www.icra.in






ICRA ONLINE LIMITED
Corporate Office
107, 1st Floor, Raheja Arcade
Plot No. 61, Sector-XI, CBD Belapur, Navi Mumbai
Maharashtra-400614.
Ph : +91-22-67816163 (Direct); 67816100
Fax : +91-22-27563057
Investor Desk: equity.research@icraonline.com www. icraonline.com
Disclaimer: Although reasonable care has been taken to ensure that the information herein is true, such information is
provided as is without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or
implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be
construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this
publication or its contents. ICRA grades are not a recommendation to buy, sell or hold any securities of the graded entity.
ICRA Equity Research Service Power Finance Corporation


31



This Report is solely for the personal information of the authorized recipient in India only. The information contained in
this report shall in no way either directly or indirectly be reproduced, redistributed, communicated in any form
whatsoever to any other person both within India or outside India. Nor is it permissible for the information to be
disseminated or copied in whole or in part, for any purpose whatsoever.
Disclosure: The ICRA Equity Research Service is a mandate-based, paid service. In this case, ICRA or ICRA Online has
received both the mandate and the research fee from the entity reported on.