**[investwise]** Daiwa Puts A Buy On Power Finance Corporation

 

We forecast PFC's interest spread to drop by about 20 basis points year-on-year for FY11, as we expect its borrowing costs to rise. We forecast incremental spreads on fresh loans of 2-2.5% for FY11, compared with 3-4% for FY10. However, as we estimate that about 55-60% of the company's loans are likely to remain locked at high interest spreads for FY11, we expect the downward pressure to be marginal.   We forecast 25% YoY loan growth for FY11   􀂃 Power-generation capacity commissioned up to December 2009 under the 11th Five-Year Plan (FY08-12) totalled 17,140MW. However, the Ministry of Power forecasts 45,234MW of capacity to be commissioned over the remaining 2.25 years of the plan. This should increase the need for funds in FY11-12. Hence, we forecast the loan book to expand by a CAGR of at least 25% for FY10-12 (from 20% YoY for FY10).   We reiterate our Buy rating 􀂃 We believe that given the low credit cost and high loan-growth visibility, the stock should trade at a PBR of 2.5x on our FY11 BVPS forecast. We see a change in regulatory guidelines and a higher-than-expected fall in the interest spread as the key risks.   􀂃 The risks are lower-than-expected loan growth, as well as higher-thanexpected NPLs and compression of the interest spreads. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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