Sakthi Sugars - Promoter Buying

The Vice Chairman and Managing director has bought close to 0.1% his total outstanding shares, an announcement in todays NSE Website section. He looks like a person who is positive in this segment that has only seen a downside over the past two-three months.

Power Finance Corporation - Raising money for Branding

Well, an IPO for no reason. The GOI feels that the publicity that the company is getting till date is not sufficient and the stock exchange would provide this solution. That is the objective for the IPO, raise money but no definite use from the funds raised. It also says that the funds will augment its capital base.

Issue Details

Issue Size : Rs. 856 crores to 997 crores
Issue Date :January 31 to February 6
Price : Rs.73 to Rs.85
Post Issue Equity Dilution: 10.22%
Book Running Lead Managers: Enam, ICICI Sec, Kotak

Company Background

The company's primary activity is to channel savings into power generation. It was started in 1988 and have most of the clients in this sector under their fold.The company's financial products and services include financing in the form of rupee term loans, foreign currency loans, bridge loans, short term loans, transitional loans, bill discounting, equipment leasing, buyers’ line of credit, loans to equipment manufacturers, line of credit for the import of coal, debt refinancing, asset acquisition schemes, study assistance and non-fund based products such as guarantees, letter of comfort and management advisory and consultancy services. The company is involved in AG&SP program as well as the UMPP program. The company has been awarded a "Mini Ratna" status giving freedom to run its operations. The company has assets exceeding 40,000 crores.

Objective of the Issue

The company intends to use this capital for raising its equity base. Also, the company believes in using the stock exchange to increase its publicity and could also serve to liquidate GOI share at a latter date.

Strengths

• There is extensive knowledge that has been gained by the company in this sector. The company share in this business is more than 10-20%.
• The business is regulated by RBI and if the company has to follow the guidelines from RBI as a part of NBFC, this can reduce their exposure limits to certain entities.
• The current gross NPA is 0.23%, extremely low. However, we need to look at the debt books to see how much is actually given provision for.
• It is trying to diversify its client and product portfolio (in power)
• It is de-risking its lending portfolio by co-lending with various institutions.
  

Weakness

• Single product portfolio and is extremely dependant on state electricity boards for its revenue.
• There is a client concentration risk. The top 10 clients and groups accounts to 45% and 67% of the borrowing. Also, some of them are loss making entities.
• The nature of loans has been clearly mentioned. However, certain risks include in the lending books. The nature/value of the collateral, ability of the state to back the loan in case of guarantee (currently 45% of the loan book).
• There is a negative cash flow in business.
• The NIM is reducing and is currently at 3.37%.
• The company receives subsidy from the govt. under the Accelerated Generation and Supply Program in advance on a NPV formula. This can create losses incase there is some change in the factors.
• Some of the projects such as Sasan, UMPP, has been awarded to Lanco at extremely low price. The viability of such a low price is still questionable. If they fail to get the financial commitment for their project, this can delay the implementation of the project. This can delay the execution of the project.

Opportunity

• The opportunity mainly is in the largely unment demand that currently exists in the system. On an average, we have a unmet demand of around 8% and 12% in peak demand.
• The company is starting a venture capital fund for investing in power generating companies.
• The current Electricity Act gives much more freedom for regulators to fix tariffs.
• Most of the funding from World Bank and ADB is going towards restructuring the SEBs. Once we significant reduction in T&D losses, we can expect this industry to invest in generation.
  

Threat

• Removal of SLR Bond status, tax free bonds can affect their borrowing program.
• The government has largely failed in keeping its commitments in implementation of its program.

Financial Analysis

• The company has a strong disbursal growth at over 21% CAGR in the past five years.
• Book Value : Rs. 66.68
• RONW: 13.06%
• AG&SP forms 24% of the loan portfolio.
• The company's subsidy from the government has remained at similar levels inspite of growing disbursements. This could indicate efficiency in its collection.
• The current assets is at 0.95.
• The reserves are currently growing at 14% and the total equity employed is increasing by 11%. This is quite healthy considering the income growth of the company.
• The company is currently maintaining less than 1.5% in reserves for bad debts. That is quite aggressive.
• The interest cost is increasing by about 12% CAGR basis. Again, the company has done well here. Only 10% of the loans are short term in nature. This implies that the company may not have an duration mismanagement as much as a bank that borrows short to lend on long term.
• The net profit growth is approximately 8% CARG in the past four years. However, this has been extremely erratic with the 2003 being one of their best years. Post this, the operating profit has been declining.
• The cash from operations has also been affected for the same as mentioned in the previous point.
  
• The company primarily raises money from banks/financial instutions and open market (~75-80%).
• The company has lowered its foreign currency risk by lending and borrowing in a similar currency.
• Its dividend policy is quite insistent though it is a regular dividend player
• The per share of PTC for PFC holder is approximately Rs. 0.75 . If this is discounted from the current share price, the EPS will fall further

IPO Pricing
P/E - 7.7 to 8.97.
P/BV - 1.15 to 1.34

I have not made any comparison due to lack of a proper alternative comparable company in this industry.


Interesting Thought and Summary

• The company's outstanding loan book is at Rs.38,562 crores. The IPO will raise only 1000 crores in the higher end. What is the company going to do with such a paltry amount? A company that has a very strong credit rating can raise funds at one of the cheapest rates and there is no requirement for the company to come out with this IPO.
• One of the directors of this company is my institute head too!
• Though there is nothing to lose for the company in this IPO, I would still invest considering the sector attractiveness only.