Power Finance Corporation’s (PFC’s) Q1FY08 numbers were ahead of our expectations. Profit after tax (PAT) grew 100% plus to INR 3.09 bn, primarily driven by foreign exchange gains of INR 409 mn booked in Q1FY08 as against forex loss of INR 305 mn in Q1 FY07. This gain was on account of Rupee appreciation impact on the company’s foreign currency borrowings of INR 19 bn. Excluding the foreign exchange gains, PAT grew 60% Y-o-Y to INR 2.78 bn, supported by improvement in margins and higher fee income.

Key quarterly highlights

Loan book grew 23% and disbursements improved 12.7%.
Spreads improved 22bps Y-o-Y to 1.93%.
Net-interest income grew 38%.
Management and upfront fee of INR 137 mn booked.
Net NPA declined to near zero levels and provision coverage increased to 70%.

We are revising our EPS estimate upwards by 4% for FY08E to INR 11.9 and by 2.5% for FY09E to INR 13.9 (adjusted for tax benefits) to factor in relatively higher margins and better fee income.

The stock currently trades at 2.1x FY09 book (adjusted for tax benefits and reserve for doubtful debts) and 14.1x FY09E earnings. We expect RoE to improve to 15% by FY09E from 12% in FY07. The stock price has moved up by 35% in the past one month and valuations appear fair at these levels. We recommend investors to book profit and re-enter the stock at lower levels. However, we continue with our ‘ACCUMULATE’ recommendation from a long term perspective, considering strong industry outlook on the infrastructure space, unique power financing play, and the stock’s inadequate liquidity with only 10% free float.