Power Finance Corporation Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Record profit, steady margins: Standalone Q2 net profit hit an all-time quarterly high of INR4,370 crores, while NIM improved 20 bps YoY to 3.57%, staying within the guided 3–3.5% band.
• Asset quality at a multi-year low: Gross NPA ratio fell 96 bps YoY to 2.71%, the lowest since FY2019, driven by active resolutions including the INR2,376 crore Lanco Amarkantak loan.
• Disbursement engine restarted: After a subdued Q1, Q2 disbursements of INR46,663 crores brought H1 to INR66,146 crores, and management expects to sustain the pace to hit ~14% loan growth for the year.
• Capital adequacy dipped on risk-weight shift: CRAR fell from ~27% to 24.5% as new disbursements to capital works without government guarantees attract a 100% risk weight, versus 20% previously; retained capital is needed to fund this growth.
• What to watch next quarter: Resolution of TRN and Shiga Energy assets, which management expects to conclude this financial year with a slight write-back, and the pace of loan growth as the base expands.

Profitability & Margins

• NII driver: Net interest income grew 21% YoY to INR8,736 crores in H1, the primary engine behind the 18% YoY rise in H1 net profit to INR8,088 crores.
• Yield and spread: Yield rose ~19 bps to 10.11%, spread widened to 2.61% from 2.51%, and NIM improved 20 bps to 3.57%, all within the guided range.
• Cost of funds stable: Remained at 7.50%, within the expected range.
• Margin outlook: Management expects margins to remain within the 3% to 3.5% range.
• Repo rate sensitivity: Management declined to quantify the impact of a 25 bps repo rate cut, noting borrowing is not linked to the repo rate and the mix of bond market and bank MCLR funding must be assessed first.

Chopra: "The average cost of borrowing will be the basis for the internal card rates."

Asset Quality & Resolutions

• Gross NPA milestone: The 2.71% ratio is the lowest since FY2019, when it stood at 9.39%, achieved through resolution of ~55% of the stressed book since then with average recoveries exceeding 60%.
• Lanco Amarkantak: The INR2,376 crore loan was resolved via NCLT approval, triggering a provision reversal of ~INR200 crores.
• Stage 3 movements: Two loans of INR313 crores moved out of Stage 3; one loan of INR304 crores was technically written off with no P&L impact as it was already 100% provisioned.
• KSK Mahanadi recovery: Recovery is expected to exceed the claim amount; management is waiting for the final NCLT order before allocating cash.
• Sinnar Thermal Power: Bids have been received and evaluation is ongoing; management expects to finalize in about a month and then submit to the NCLT.
• TRN and Shiga Energy: Both are expected to be resolved within the current financial year, with a slight write-back anticipated, though the exact amount depends on NCLT approval and implementation.
• Stage 2 assets: Management declined to quantify Stage 2, stating most are state-sector projects that oscillate between Stage 1 and Stage 2 quarter to quarter and that quantification is not relevant.
• Provisioning conservatism: Management acknowledged being conservative in provisioning and expects good recoveries relative to provisions made.

Chopra: "In KSK, our recovery is more than the claim amount."

Loan Growth & Disbursements

• H1 disbursement recovery: After a subdued Q1 due to BCG transformation strategy implementation, Q2 disbursements of INR46,663 crores brought the H1 total to INR66,146 crores, supporting 10% YoY loan asset growth.
• Sanctions pipeline: Sanctions of ~INR160,000 crores in H1 provide visibility for future disbursements.
• Growth guidance: Management expects to maintain ~14% loan growth for FY25, similar to the previous year, and confirmed this target is still achievable after deciding not to proceed with the Shapoorji Pallonji loan.
• H1 loan growth muted by recoveries: Recoveries were scheduled higher in the first half, which masked the impact of INR64,000 crores of disbursements on net loan growth.
• Longer-term growth caution: As the base expands, higher percentage loan growth may not be possible; future growth will depend on how the economy and infrastructure sector perform. [14-15]
• Conventional generation: Sanctions of INR50,000 crores to conventional projects in H1 reflect the government's push to almost double thermal capacity by 2030; complete disbursement will take another 3 to 4 years.

Infrastructure & New Sectors

• Infrastructure portfolio: Major outstanding balances include the HPCL Rajasthan Refinery, manufacturing facilities for private developers, and various ports.
• Cautious approach: Management is following a "steady and slow process" for infrastructure funding, being cautious as it is a new sector for the company.
• Shapoorji Pallonji decision: The Board decided not to sanction the loan after detailed due diligence, because the sector is new and management did not want high-end exposure.
• Vodafone Group: Management confirmed it was never in the consideration zone at PFC.
• Adani Bangladesh project: No single day of delay in recoveries from the Jharkhand project supplying power to Bangladesh; the promoter expects to receive payments from the Bangladesh government soon.

Chopra: "Shapoorji Pallonji, we have done a detailed due diligence, but somehow the Board in its wisdom has decided that since it's a new sector for us, so we may not take that high-end exposure."

IFSC GIFT City Subsidiary

• Subsidiary approved: PFC Infra Finance IFSC Limited received approval from the IFSC Authority to commence operations as a finance company in GIFT City, the first dedicated to power and infrastructure lending in the IFSC.
• Largest foreign currency deal: PFC executed a USD126.5 crore term loan deal with multiple banks at IFSC GIFT City, a first for an Indian PSU.
• Tax benefit: The subsidiary will enjoy a 10-year tax holiday in IFSC GIFT City.
• Demand visibility: Management reports strong interest from power sector developers in India for foreign currency loans from the GIFT City entity.
• Growth pace: Operations will start after capital infusion and debt raising; management intends to go slow initially until capital is built up, and no specific timeline or percentage of loan book target was given.
• Margin question unanswered: When asked if profit margins would be much higher due to tax benefits, management said it is very difficult to answer at this stage.

Chopra: "We have a lot of interest from various especially power sector developers in India for taking a foreign currency loan from our GIFT City project."

Capital, Provisions & Regulatory

• Capital adequacy decline: CRAR fell from ~27% to 24.5% because new disbursements to capital works without government guarantees attract a 100% risk weight, compared to 20% for earlier government-guaranteed scheme loans.
• Capital retention need: Management needs to retain capital to support consistent growth as disbursements shift toward non-guaranteed capital works.
• Dividend policy: PFC will continue to follow government guidelines of 30% of PAT or 5% of net worth, whichever is higher; an interim dividend of INR3.5 per share was declared, bringing the cumulative FY25 dividend to INR6.75 per share.
• ECL provisions: On the RBI circular on expected credit loss provisions for project financing, management declined substantive comment, noting only that suggestions have been made by various lenders and the industry awaits the final version.
• Asset-liability repricing: On liabilities, ~27% is floating rate and ~72-73% is fixed rate, as most borrowing is from the bond market which lacks depth for floating rate bonds. On assets, ~95% is floating rate with 3-year or 1-year reset clauses tied to internal card rates.

Chopra: "I think your observation is correct. We have been conservative in provisioning. And as a result, we are expecting our recoveries to be good as compared to the provisioning whatever we made."

Guidance & Commitments

Key Metrics