PTC India Financial (Q1 FY15)

• Slow start to a likely strong year; loan assets still grew by robust 84% yoy

• NIM impacted by increase in cost of funds; to gradually come-off from current high levels

• Asset quality remains intact; net profit rises by 113% yoy

• Overall earnings performance in-line; Re-iterate BUY with 24-month price target of Rs65

Slow start to a likely strong year; loan assets still grew by robust 84% yoy

PTC India Financial’s (PFS) disbursements and sanctions during the quarter stood at muted Rs2bn and Rs1.6bn respectively. Apart from the traditional weakness witnessed during the first quarter of every fiscal, election/policy related uncertainty is likely to have impacted new projects announcements and progress on existing projects in general. Despite the weak start, PFS remains confident of surpassing FY14 disbursements (Rs30.7bn) in the current fiscal encouraged by huge outstanding sanctions (Rs104.6bn) and a pick-up in loan approvals witnessed in the current quarter. Sequential growth is loan assets (nearly flat) was additionally impacted by repayment of a sizeable corporate loan (in energy value chain segment). However, on yoy basis, loan assets still represented a robust 84% growth. The segmental asset mix was largely stable qoq with Thermal and Renewable power projects contributing 35% each. We expect PFS’s loan assets to grow by 50%+ yoy in FY15 and triple in size by end-FY17 (conservative assumptions vis-a-vis company’s expectations).

NIM impacted by increase in cost of funds; to gradually come-off from current high levels

NIM declined by sharp 40bps qoq to 6.5%. This was on the back of compression in portfolio spread (13bps qoq to 4.4%) which in turn was driven by a material uptick (19bps qoq to 9.5%) in the cost of funding. There was a slight improvement in portfolio yield (6bps qoq to 13.8%) due to a steep increase in the segmental share of energy value chain funding over the past two quarters (from 13% to 21%) where lending rates are relatively better at near 15%. With funding mix incrementally moving towards bank loans (currently comprising ~75%), the incremental borrowing cost has been much higher at 10.25-10.5% (blended cost of overall borrowings at 9.5%) in the past few quarters. With incremental spreads in the range of 3.5-4% and a rapid pace of asset growth, the blended portfolio spread and NIM are likely to trend lower in coming quarters. 

Asset quality remains intact; net profit rises by 113% yoy

During the quarter, there was no addition to gross NPLs and therefore the credit cost was benign at 30bps. Also no account was restructured and the outstanding balance remained near ~Rs1.7bn, 3.4% of loans (comprising of few accounts). Provisioning on these accounts stands at regulatory required level of 5%. Apart from a reasonable possibility of slippage from these accounts, asset quality risks remain fairly moderate. Net profit jumped 113% yoy to Rs0.52bn additionally supported by a substantial 47% yoy decline in opex (cost/income ratio stood at 7% v/s 21%). PFS is well-capitalized for robust asset growth in the medium term with CAR at 26%. 

Overall earnings performance in-line; Re-iterate BUY with 24-month price target of Rs65

PFS’s Q1 FY15 earnings performance was large in-line with our expectations thus not requiring any significant revision to our financial estimates. However, we think there are upside risks to our growth assumptions and some downside risks to our NIM estimates. We see PFS delivering sustainable RoA and RoE of 3-3.5% and 17-19% respectively over the longer term. For a company poised to deliver rapid earnings growth and superior return ratios, valuation of 1x FY17 P/ABV is extremely attractive. We believe PFS’s valuation will re-rate towards 2x FY17 P/ABV over the coming two years. Re-iterate BUY with 24-month price target of Rs65.