Power Finance Corporation Rating: buy New dividend norms to offer structural boost

RBI’s draft circular on dividend declaration by NBFCs links eligibility and quantum of dividend distribution to net NPA, CRAR and leverage. For PFC, categorised as NBFC-ND-SI, based on its past three years’ CRAR and current net NPA print, the criteria matrix (as per draft circular) makes it eligible for dividend payout of up to 25% of earnings (vs its current policy of 30% of earnings or 5% of net worth, whichever is higher).

However, eligibility criteria are expected to accelerate structural improvement of PFC’s balance sheet for it to pay out higher dividends (shore up CRAR to >18% and contain net NPA to sustain at <2% for 40-45% payout). Note that being a PSE, the government would be keen to receive higher dividend from PFC. In any case, dividend yield would remain above 6%; hence there is no change in our investment rationale. Given PFC’s balance sheet expansion of >10%, steady-state RoE profile of >14% and anticipated stress resolution, we maintain Buy on the stock.

PFC eligible to pay up to 25% of net profit in near term: PFC’s past 3-year CRAR for FY21 dividend eligibility will be in the range of 15-18% and FY20 net NPA at 3.8%. Company therefore falls in category ‘C’ as per the criteria matrix and is eligible to pay out 25% dividend. This translates to a dividend of Rs 7-8/share for FY21e. At CMP, PFC’s yield would still be higher than 6% (better than prevailing G-Secs). In addition, a relatively lower dividend payout for the year will result in higher book value accretion.

Investment thesis intact; guidelines inculcate long-term discipline: Our investment thesis on PFC remains unchanged. In fact, we expect the company to work towards containing net NPLs below 2% and shore up CRAR to above 18%, so that payout can increase to 40-45%. This is possible with big-ticket resolutions going forward. Thus, the guidelines are structurally positive as they inculcate long-term discipline.

Final guidelines may be a non-event for PFC: We expect the final circular from RBI to be released by Jan’21. There is a likelihood of state-owned NBFCs being exempted in the final guidelines as government is keen to receive higher dividends from profitable PSEs (DIPAM issued an advisory in Nov’20 to PSEs to pay higher dividends). In such a situation, there will be no impact on PFC.