Power Finance Corporation: Buy

Investors can consider buying the Power Finance Corporation (PFC) stock at the current price of Rs 175 with a two-three-year investment horizon.

PFC had an exceedingly good first quarter ended June and appears set for exciting times ahead with huge investments projected to be made in the power sector in the next five years.

A strong balance-sheet with almost nil non-performing assets (NPA), focussed business model and lean cost-structure, lend confidence in the company. The stock has more than doubled from its February IPO price of Rs 85 and has risen by 68 per cent from its listing price of Rs 104.
Unique player

PFC is a unique player in the finance sector that specialises in lending to power projects and also offers non-fund-based services. The company mainly lends to thermal and hydel power generation and transmission and distribution projects. It also has a minor exposure to renovation and modernisation projects of existing power stations.

Its borrowers are predominantly State electricity boards and public electricity utilities; it has a minor portfolio of private borrowers who account for 8.4 per cent of gross outstanding loans.

The company is also the lead agency promoting the government's ambitious ultra mega power projects (UMPP) where it is responsible for securing appropriate clearances to enable the successful bidders to implement their projects.

The positive offshoot of this is a fee for the services that it renders and the possibility of securing business from the UMPP players.
Strong financials

Despite being a lender to some of the most problematic borrowers in the country — state electricity utilities — PFC boasts of a strong balance-sheet with NPAs almost non-existent. The company employs different methods to ensure prompt repayment from borrowers such as a rebate for on-time repayment and an escrow mechanism to protect itself from potential default.

PFC also directly pays the suppliers of its borrowers rather than route the money through the latter. This ensures that the loan is used for the stated purpose of asset creation and is not used by the borrower for other purposes.

The company also closely monitors the financial health of its state-sector borrowers and has the ultimate option of the State government guarantee to encash if the borrowing utility defaults.

All these have helped reduce NPAs to 0.6 per cent of gross outstanding loans of Rs 45,200 crore in the first quarter. This is lower than the 0.10 per cent recorded in 2006-07. PFC is not required to follow RBI norms in this respect and, as per its own prudential norms, any loan where instalment and/or interest remain due for over six months is classified as an NPA.

The company has done extremely well to beef up its net interest margin (a measure of profitability for those in the financing business) at a time of great volatility in interest rates during the first quarter of this fiscal. Net interest margin, at 3.67 per cent during the first quarter, was 0.36 percentage points higher than the same period last year.

Similarly, the spread between borrowing and lending costs has also been widening; it was 1.93 percentage points in the first quarter against 1.71 per cent in the same period last year.

A substantial quantum of PFC's loan assets is scheduled to come up for interest rate reset in the next couple of quarters and this is likely to increase the spread as also the net interest margin.

Presently, 61 per cent of PFC's loan assets are subject to reset clause while 34 per cent is on fixed rate basis and a very minor 1.3 per cent is on floating basis.

Net interest income rose by 38 per cent during the first quarter to Rs 414.7 crore while disbursements were higher by 13 per cent at Rs 3,215 crore.
Growth acceleration

The Eleventh Plan envisages a capacity addition of over 68,000 MW from the central, state and private sectors by 2012.

Given the past, this may appear an ambitious figure but it looks attainable because projects adding up to about 31,000 MW are under construction.

Funding for these projects under construction is already tied up but PFC can hope to garner a slice of the remaining 37,000 MW of projects that have been committed. These would require about Rs 1,45,000 crore and those implementing them need to tie up the funds in the next few months.

Even a small slice of this would cause a substantial addition in its loan assets; PFC though, is hoping to fund about 20-25 per cent of this huge fund requirement.

The challenge will be in accessing funds at cheap rates especially because of the new RBI norms that curb banks from lending to non-banking finance companies more than 15 per cent of their (the bank) capital.

Term loans from banks account for almost half of PFC's rupee borrowings and the new guideline could force the company to borrow from higher-cost sources. In the medium-term, this could cause a compression of spreads, especially if PFC is unable to on-lend at higher rates. This apart, the dependence on a single sector for business causes a concentration risk for the company but what lends confidence is the huge investment that is projected to be made in the power sector and the opportunity arising for PFC from that.

Investors can buy the stock with a medium-term perspective.

Bharti Airtel: Buy

The sharp decline in the broad markets over the past week offers a good opportunity to take exposures to the stock of Bharti Airtel – the market leader in the Indian mobile telephony market. Strong subscriber additions, substantial investments in capex and possible new revenue streams from overseas forays and businesses such as broadband and IPTV, suggest strong earnings growth prospects for the company over the next few years. The stock trades at about 32 times twelve months earnings, after declines linked to broad market weakness and lower-than-expected first quarter results. Investors can accumulate the stock at current levels as well as at any further declines.

Bharti Airtel continues to dominate the mobile telephony space in the country, with 1.9 million subscribers a month, at least half a million ahead of its nearest competitor. Bharti's average revenue per user (ARPU), at Rs 390, is much higher than the national average of Rs 298, indicating a continued ability to command a premium over other operators. There also appears to be scope for offsetting any decline in ARPUs through value added services. The recent tariff hike effected by the company for SMS and local calls, may also help realisations.

Over $3-billion worth of capex rollout over the next few years, including components like next generation networks (NGN) and 3G-ready networks, will enable Bharti to service a rapidly increasing subscriber base and start 3G services, as and when policy clarity emerges. International calling cards, a thrust area, may also open up revenue streams with relatively higher margins. With the company winning licenses to deliver 2G as well as 3G services in Sri Lanka and committing $200 million towards expansion, Bharti appears well placed to position itself strongly in the Sri Lankan market, which has reasonable untapped potential.

Mobile telephony apart, Bharti's Broadband and Telephone (landline) division has also been making headway, and garnering an ARPU of Rs 1,120, much higher than the national average. The impending rollout of new services such as IPTV (Internet protocol television), DTH (direct to home) may help revenues and margins. Key risks to the earnings outlook arise from any inordinate delay in release of 2G spectrum. A delay in the 3G policy announcement could mean loss of potential opportunity. Regulatory intervention on tariff increases and heightened competition in national and international long distance services, are risks as well.

MUTUAL FUNDS UPDATE

Mutual Funds Update

 

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Alok Inds inks mega land deal in Mumbai, buys 5,75 000 sq ft of office space for Rs 1,075 cr

Alok Infrastructure, the wholly-owned subsidiary of the integrated textile company Alok Industries, has bought 5,75,000 sq ft of office space in Mumbai for Rs 1,075 crore. This is the city's second-largest land deal and the country's fourth-largest.

The Ashok Piramal group's Peninsula Land was the seller of the property at Dawn Mills in Lower Parel. The largest deal in the city so far has been Reliance Industries' acquisition in Bandra Kurla Complex for Rs 1,100 crore.

However, the Alok-Peninsula deal appears to be the costliest among big deals. Alok paid Rs 17,000 per sq ft while DLF paid Rs 10,151 per square foot yesterday for 39 acres of land from DCM Shriram and the Lohias for Rs 1,675 crore in New Delhi. The DLF-DCM deal was the country's largest.

The valuation of the property is nearly doubled even before Alok pays the entire consideration to the Piramals. As per the agreement, Alok paid Rs 100 crore and is supposed to pay the balance in three years. Recently, a deal has been taken place for Rs 32,000 a sq ft in the same mill area.

Sources close to the development said Alok Infrastructure would either sell or lease out the property. Alok Industries' Managing Director Dilip Jiwrajka had recently told Business Standard that he hoped that the infrastructure business would be one of the main money spinners for the group. In addition to the lease rental business, the infrastructure arm of Alok is also setting up a 200 acre SEZ at Silvasa.

Alok also bought office premises measuring 65,000 sq ft at Ashford Centre in Lower Parel for Rs 70 crore, which is being developed by Ashford Universal.

The Ashok Piramal Group's Peninsula Land is developing office space with a total saleable area of 1.1 million sq feet in Dawn Mills which the group acquired two years ago.

Pre-sales in commercial properties is rapidly catching up in Mumbai which has an acute shortage of space. Developers are selling off their properties at bulk rates to raise funds for their development.

According to property consultant DTZ, Mumbai is the only city facing an office space shortage among the major cities.

While 6.4 million sq ft office space was absorbed in Mumbai in 2006, the market is expected to absorb 7.5 million sq ft office space in 2007 against the availability of 6.9 million sq ft this year, resulting in a supply-demand gap of 0.6 million sq ft, DTZ said.

Prabhudas Lilladher positive on PSL

By far the world's largest H-SAW pipe manufacturer (over 1m tpa at ten places in India), PSL produces 16" to 120" dia. pipes of thicknesses ranging from 5 mm to 25 mm. It started in 1988 as a pipe-coating plant, then integrated backward to start its first pipe-manufacturing plant in Chennai in FY96. All its plants are API approved (capable of producing X 70 grade pipes) and accepted by most of the oil & gas companies, including Shell. Its basic strength lies in its low capital cost due to in-house manufacturing of plant machinery and equipment, providing it with an edge over competition.

Domestic demand is up significantly compared to previous year -- and 80% of PSL's revenue comes from the home market, contrasting with 20% for its domestic peers. It has consolidated its position at home due to its competitive pricing policy, and is thus favourably poised to capture most of the domestic demand.

Though revenue during FY07, at Rs 15,832m, was almost flat, the margin expanded 90bp, to 9.6%. PAT rose 26.5%, to Rs 622m. With the growth in volumes, margin improvement is expected, leading to a significant growth in the bottom line. At the CMP, the stock trades at 13x FY08E first cut earnings of Rs 25.7.

Healthy order book

PSL's current order book of Rs 22bn is to be executed over the next nine to twelve months. Besides this, it has submitted bids (along with other manufacturers) worth Rs 30bn and awaits decisions on them.

Future Projects

In June 07, PSL commissioned 75,000 tpa H SAW pipe manufacturing plant at Sharjah,UAE to cater to the Middle East and gulf countries. The plant is expected to get necessary API approval from various oil & gas companies within 6 months.

It has started work on setting up a 300,000 tpa H saw pipe manufacturing plant in USA. This plant would be spread over 156 acres of land and expected to be commissioned by April 2008. The total investment is about US$60 mn. It is a joint venture with 70% stake held by PSL.

Concerns

PSL's plants (at different places) are relatively small. Lack of sufficient orders may lead to low capacity utilization, affecting margins and earnings. In fact, PSL's margins are lower than its peers only because of this.

Though revenue and growth are visible, yet, since the business is project-based, lumpy revenues might result due to delay in booking revenue.

Valuation

At the CMP, the stock trades at 13x FY08E first-cut estimates and 6.7x those of FY09E. With mounting investment in oil & gas infrastructure and in water infrastructure in India, the company expects its volumes to rise. We remain positive on the stock.