Thursday, June 5, 2014

Why it makes sense to buy Power Finance Corporation ?

1) Power Finance corporation  lends to Power Plants and Power Transmission companies
2) The stock is trading at 8x 2014 earnings and at 1.4x book value. Most private sector banks in India trade at P/E > 20x and Price / Book value ratio > 3x
3) Earns a net interest margin of 3.4 percent which is better than most public sector banks and even some private sector banks
4) Return on equity of 24% which is better than most private sector banks  - HDFC bank has an RoE of 21 percent, Kotak bank has an RoE of 15 percent.
5) Capital Adequacy ratio of 20% which as well is notably better than most private and public sector bank. Kotak bank which probably has the best CAR of 19 percent is even lower than PFC.
6) Not to forget growth, Adjusted  EPS CAGR for the last 5 years has been a whooping 26 percent which as well is comparable to the best private sector banks in India.
7) Even from an NPA perspective PFC has a gross NPA ratio of 0.71 percent comparable to most private sector banks like HDFC, Kotak  Bank and ICICI

CONCLUSION - WITH BOTH PERFORMANCE AND VALUATION RATIOS SUPERIOR TO THE BEST PRIVATE SECTOR BANKS, I THINK PFC IS SIGNIFICANTLY UNDERVALUED.








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