Power Finance Corporation Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Record profit, but spread compressed: Profit hit a new high, yet spread fell ~40 bps as rate cuts implemented over two years hit yield before recent hikes could take effect.
• Disbursement revival underway: Loan growth revived post-COVID, driven by distribution sector lending and government schemes, with FY24 growth guided at a double-digit pace.
• Asset quality improved sharply: Successful resolution of Stage 3 assets drove provisioning reversals, lifting the provision coverage ratio from 69% to 73% even as absolute provisions fell.
• Infrastructure lending is the new leg: PFC received approval for infrastructure lending and signed an MOU with RITES for technical support, framing it as a gradual, long-term build-out beyond power.
• What to watch next quarter: The pace of loan book reset (one-third of the book this year) and whether the recent rate hikes stabilize spreads within the targeted range.

Spread, Margins & Rate Dynamics

• Spread compression mechanics: PFC cut lending rates by 165-300 bps from September 2020 to December 2022, following the lower rate regime. When market rates rose, borrowing costs increased immediately, but the yield benefit from rate hikes in December 2022 and March 2023 is yet to materialize.
• NIM stability despite yield drop: Full-year margins held nearly flat at 3.36%, with Q4 at 3.39%, because the cost of funds increase was contained to 20 bps. Management expects NIMs to remain at similar levels through the upcoming book reset.
• Cost of funds outlook: Interest rates have hardened but management expects stabilization at current levels, though this remains linked to international market movements.
• One-third book reset this year: Under the three-year reset policy, a large portion of the loan book will reprice; future disbursements and resets will occur at the newly increased rates.

Ravinder Singh: "So as has been indicated, our spread has decreased and basically our interest rates, we had implemented a decrease in the interest rates and then, there was an increase... So that effect of increase is yet to materialize"

Loan Growth & Disbursement Drivers

• Post-COVID revival: The pandemic dampened loan asset growth for two years; the revival of economic activity, combined with lending to the distribution sector and government schemes, drove the uptick in disbursements.
• FY24 growth guidance: Loan book growth is expected to be around the double-digit mark, with disbursements at almost the same level, supported by a reviving economy, renewable and transmission projects, and the start of RDSS counterpart funding toward end-FY24.
• Sanction pipeline conversion: The ₹2.3 lakh crore sanction pipeline will take around two to three years to implement; infrastructure projects may take longer.
• Private sector share rising: The private sector share of the loan book rose from 17% in FY22 to 26% in FY23 and 33% in Q4, driven by renewable energy projects, which are predominantly private and aligned with the government's 500 GW target.

Asset Quality & Resolution

• Provisioning reversals: Continuous resolution efforts over several years yielded exceptional results; successful resolution and upgradation of Stage 3 assets contributed to provisioning reversals without additional credit cost.
• PCR improved despite lower absolute provisions: The overall provision coverage ratio on Stage 3 assets enhanced from 69% to 73%, majorly due to increased provisioning on TRN Energy and Maheshwar, even as absolute provisioning decreased due to resolution of assets and lower NPAs.
• Interest reversal from discom upgrades: A large part of the interest reversal in Stage 1 and Stage 2 was due to the half-yearly rating exercise, where many discoms complied with conditions and submitted accounts, leading to upgrades.
• Key stressed assets in process: A letter of intent was issued for the Lanco Amarkantak resolution, but management declined to give a timeline as it is a legal process. KSK Mahanadi consolidation is under NCLAT, Sinnar Thermal proceedings are stalled, and Maheshwar Hydel's CIRP process is stayed.

Ravinder Singh: "This is a legal process, which is there, So we will refrain from giving any time line."

Strategic Shifts: Infrastructure & Energy Transition

• Infrastructure lending approved: PFC received approval in August 2022 for infrastructure lending as a new business line and signed an MOU with RITES on 26 May 2023 for technical assistance, including traffic studies and expertise in infrastructure projects.
• Gradual build-out, not a pivot: Management clarified the idea is not to shift focus from power to infrastructure but to gradually build it over time as a separate business line, as the power sector matures. A restriction limits infrastructure sanctions to around one-third of total assets during the year.
• Energy transition focus: Business priorities will align with government targets, with active thrust on green hydrogen, battery storage, pump storage and offshore wind. Conventional generation lending will continue but not at the same scale as in the past.
• Focal agency ambition: PFC is in discussions with the Ministry of Power and Ministry of Finance to become a focal agency for lending to renewables and energy transition, after a proposal to become a DFI for energy transition was not accepted by the government.
• New-area challenges: Management identified credit appraisal for new project types and the need for cheaper cost of borrowing, potentially through special government dispensations or raising funds from outside, as key challenges for viability gap funding of green hydrogen and offshore wind projects.

Ravinder Singh: "The idea is not to shift focus from power to infra but to gradually build it over time, creating a separate business line, as the power sector matures. But yes, it will be forming part of our future lending business going forward"

Discoms & Distribution Sector

• LPS scheme impact: The LPS scheme achieved a 40% reduction in outstanding dues of DISCOMs to GENCOs within 10 to 11 months. The remaining balance is expected to be disbursed over the next one to two years.
• Rating-linked improvements: The half-yearly rating exercise showed many discoms complied with conditions and submitted accounts, leading to upgrades and interest reversals. Further improvement in compliance and financials could drive additional rating reviews.
• Portfolio health linkage: Management stated that with the financial health of discoms improving, the overall portfolio assets will be on a better footing, though it did not directly address whether the book size would decrease as the ACS-ARR gap narrows.

Fee Income & Other Financial Items

• Fee income halved: Fee and commission income fell almost 50% because the prepayment premium component was very low this year; last year, prepayments were high as banks offered lower rates post-COVID to commissioned projects, but that liquidity has now dried up.
• 54 EC bonds growth: The low-cost 54 EC portfolio, with a coupon rate of 5%, witnessed a remarkable 65% increase.
• Borrowing program: The Board approved a borrowing program of ₹80,000 cr for FY24 to raise funds from domestic and international markets through bonds, term loans, commercial paper and other avenues.
• JSW Energy refinancing: PFC undertook one of the largest financing deals in the renewable energy space, refinancing a JSW Energy loan of ₹6,112 cr for Mytrah Group renewable energy projects.

Guidance & Commitments

Key Metrics