Progress on stressed assets to improve Power Finance Corporation margins

Near-term pressures to remain given higher focus on low-margin segments of refinancing, renewables

After falling over 8 per cent intra-day on Tuesday, the stock of Power Finance Corporation (PFC), recovered 1.2 per cent to Rs 82.15 on Wednesday. Net interest income (or NII) — the difference between interest earned and expensed — for the June quarter plunged 23.5 per cent year-on-year to Rs 19.9 billion. Yet, lower additional provision for stressed assets led to 22.4 per cent rise in net profit to Rs 13.7 billion. What helped change investor sentiment about the stock was the status of stressed assets.

According to the management, major private stressed power accounts will be resolved soon, thus pushing up core income and profitability on adding back interest.

Close to 89 per cent of the company’s loan book is stress-free (82 per cent is from the government sector).

Deals for 17 per cent of stressed assets worth Rs 308 billion is expected to be closed soon with minimum haircut, including three accounts part of PFC’s stage-III bucket (bad loan category under IND AS), in Q1. The company has either entered into final settlement or has had accounts restructured.

For accounts such as Dans Energy (hydro-based power project in Sikkim), power purchase agreements have been signed, power supply has commenced, and the company has started paying its dues. It has also made significant progress in resolution of some other stressed accounts.

Net interest margin (NIM) contracted 91 basis points (bps) year-on-year to 3.26 per cent, due to increase in share of the less profitable refinancing business and renewable assets. 

This led to a 40 bps year-on-year fall in spread to 2.5 per cent (difference between rate of interest earned and cost of funds). 

Given the focus on these segments, profitability is likely to come under pressure. Further, the management expects the spread to remain close to this level, given the competitive environment.

However, “once we are able to settle the stressed assets, our NIM will definitely improve back to the 4 per cent level”, the management said during the Q1 earnings call. 

Besides, an improvement in power demand not only adds to the loan book but can also help in resolution of stressed assets. The worst, according to the management, is behind — in terms of provisioning of stressed assets.