Power Finance Corporation Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Record profit, clean book: Standalone PAT hit an all-time quarterly high of INR3,847 crores (up 28% YoY), while net NPA fell to 1%, its lowest in six years, with no new NPAs added in the last twelve months.
• Loan growth moderating by design: The 19% loan growth was powered by renewables and distribution, but management is guiding toward a 15–20% range going forward, explicitly because the large base makes 20–25% unsustainable.
• Spread story intact, with a floor: Margins are expected to hold at 3.25–3.5%, even as renewable assets carry lower spreads, because their shorter gestation pulls revenue forward; cost of funds is moving with the market and further increases are expected.
• Resolution pipeline is real but slow: A ₹540 cr provision write-back landed this quarter, and management expects one or two more resolutions this fiscal year, but NCLT delays remain severe, with some projects not even admitted after two years.
• What to watch next quarter: Whether the guided 15–20% loan growth holds as the base expands, the pace of any further cost-of-funds increase, and whether the promised one or two resolutions actually close before March.

Loan Growth & the Power Sector Opportunity

• Growth engine shifting to renewables and schemes: Disbursements were 2.5x the prior H1, driven by renewable energy projects (37% YoY growth) and lending to discoms under government schemes like LPS and RDSS.
• Base effect forces realism: Management explicitly walked back any 20–25% growth expectation, stating the ₹4.5 lakh cr loan book means the realistic target is 15–20% by capturing share of total power sector investment.
• Renewable lending is long-duration: Despite shorter construction periods, renewable projects have a ~20 year economic life, so PFC lends for ~15 years; portfolio churn is not fast, and no asset quality challenges have emerged from small renewable projects.
• Infra is a slow-build complement: Sanctioned ~INR25,000 crores in the first year since adding infrastructure and logistics, but disbursed only ~5% (~INR1,900 cr); management is taking a cautious, incremental approach, and disbursement timelines stretch from conceptualization through land acquisition and approvals.
• The addressable pool is enormous: Approximately INR33 lakh crores of investment is required in the power sector by 2032 per the National Electricity Plan, with capacity expected to double from 480 GW in the next 8–9 years; storage, hydrogen, and green ammonia are highly capital-intensive emerging opportunities.

Parminder Chopra: "We are not you that we are going to grow at 20% or 25% because we know that our base is growing day by we are growing on the base. So we are keeping our target for growth under around 15% to 20% only."

Asset Quality & Resolutions

• A six-year clean-up milestone: Net NPA dropped to 1%, the lowest in six years, with gross NPA declining 109 bps to 3.67%; no new NPAs were added in the last year.
• Provision write-back landed this quarter: A ₹540 cr reversal came from a renewable asset previously under court stay (Stage 2), triggered by a change in management and resolution; this was not related to Dans Energy.
• State sector remains resilient: 82% of lending is to the government sector, and state utilities have not faced debt servicing challenges; management sees no pressures emerging, and the government is focused on making discoms viable through LPS and RDSS rather than pursuing ownership changes.
• Resolution pipeline is clogged: 22 projects remain under resolution (13 in NCLT, 9 outside), but the process is slow; some projects have not been admitted to NCLT for two years, and even Lanco, where a resolution plan has been submitted, still awaits NCLT approval.
• ECL policy under external review: CRISIL has been appointed as an external consultant to assess the ECL policy, considering the overall power sector outlook, borrower-specific factors, and state sector finances; management considers current provisions adequate.

Parminder Chopra: "There are few projects that for the last two years, it has not still been admitted in the NCLT. Once admitted, it is going to take a process. Even if we talk about the Lanco, the resolution plan has been submitted by the resolution applicant back; but we have not received the NCLT approval."

Margins, Spreads & Cost of Funds

• Yield improvement is gradually visible: Lending rate increases implemented since December 2022 to reflect higher cost of funds are now showing up in the numbers.
• Cost of funds moving with the market: H1 FY24 cost of funds was 7.41% versus 7.30% in H1 FY23, in line with benchmark rate movements; further increases are expected as market conditions evolve.
• Margin guidance holds at 3.25–3.5%: Renewable assets carry lower margins, but their shorter gestation period means revenue flows earlier; management expects to maintain the guided band.
• Infra margins are an open question: Management declined to give any guidance on margin differentials for infrastructure lending, saying it is too early; the current infra book is primarily government projects, many backed by a Government of India guarantee, so the risk profile differs from private-sector lending.

Discoms, RDSS & the LPS Turnaround

• LPS is working: More than 50% reduction in discom dues to generation companies since June 2022, improving the financial discipline of discoms.
• RDSS is scaling: 12 states' action plans have been approved, covering 100% of PFC's eligible and willing states; projects worth INR1.17 lakh crores have been sanctioned.
• Smart metering as the game changer: Management sees smart metering under RDSS as the key lever for reducing mounting AT&C losses.
• Counterpart funding disbursements are back-ended: No major disbursements under counterpart funding are expected this financial year; they may begin in Q1 of the next fiscal year, with the last quarter of this year dependent on state progress.

Parminder Chopra: "The smart metering under RDSS is another area which I believe has the potential to be a real game changer for reducing mounting AT&C losses."

Funding, Hedging & Capital Management

• Liability-side innovation: PFC issued its first three-year zero coupon bond, raising ~INR480 crores, the first such issuance by any government company; it also raised ~INR2,800 crores via a second public issue of taxable bonds, oversubscribed more than 5x.
• Foreign currency borrowing active: Raised ~USD-equivalent 690 million in H1 FY24.
• Hedging materially improved: 83% of the foreign currency portfolio is now hedged, up from 68% in September 2022; 100% of USD exposure maturing in the next five years is hedged; the company is also taking exposures in JPY and EUR to mitigate exchange losses, as the INR depreciated against the USD but appreciated against EUR and JPY.
• Shareholder returns maintained: An interim dividend of INR4.50 per share was declared, continuing the quarterly dividend practice; the 1:4 bonus issue announced in the prior quarter was successfully closed, with post-bonus equity share capital at INR3,300 crores.

Guidance & Commitments

Key Metrics