Electricity transmission pylons close to Dungeness Power station, operated by Electricite de France SA (EDF), in Dungeness, U.K., on Monday, Oct. 26, 2020. The U.K.’s energy provide buffer is set to shrink this winter compared to final year due to outages at energy plants and the unexpected closure of two of Calon Energy Ltd.’s gas-fired stations following the enterprise went into administration. Photographer: Chris Ratcliffe/Bloomberg
RBI’s draft circular on dividend declaration by NBFCs hyperlinks eligibility and quantum of dividend distribution to net NPA, CRAR and leverage. For PFC, categorised as NBFC-ND-SI, primarily based on its previous 3 years’ CRAR and present net NPA print, the criteria matrix (as per draft circular) tends to make it eligible for dividend payout of up to 25% of earnings (vs its present policy of 30% of earnings or 5% of net worth, whichever is larger).
However, eligibility criteria are anticipated to accelerate structural improvement of PFC’s balance sheet for it to spend out larger dividends (shore up CRAR to >18% and include net NPA to sustain at <2% for 40-45% payout). Note that becoming a PSE, the government would be keen to acquire larger dividend from PFC. In any case, dividend yield would stay above 6% therefore there is no alter in our investment rationale. Given PFC’s balance sheet expansion of >10%, steady-state RoE profile of >14% and anticipated pressure resolution, we sustain Buy on the stock.
PFC eligible to spend up to 25% of net profit in close to term: PFC’s previous 3-year CRAR for FY21 dividend eligibility will be in the variety of 15-18% and FY20 net NPA at 3.8%. Company hence falls in category ‘C’ as per the criteria matrix and is eligible to spend out 25% dividend. This translates to a dividend of Rs 7-8/share for FY21e. At CMP, PFC’s yield would nonetheless be larger than 6% (improved than prevailing G-Secs). In addition, a somewhat decrease dividend payout for the year will outcome in larger book worth accretion.
Investment thesis intact suggestions inculcate lengthy-term discipline: Our investment thesis on PFC remains unchanged. In reality, we anticipate the enterprise to work towards containing net NPLs under 2% and shore up CRAR to above 18%, so that payout can raise to 40-45%. This is doable with major-ticket resolutions going forward. Thus, the suggestions are structurally constructive as they inculcate lengthy-term discipline.
Final suggestions might be a non-occasion for PFC: We anticipate the final circular from RBI to be released by Jan’21. There is a likelihood of state-owned NBFCs becoming exempted in the final suggestions as government is keen to acquire larger dividends from lucrative PSEs (DIPAM issued an advisory in Nov’20 to PSEs to spend larger dividends). In such a predicament, there will be no effect on PFC.