Scary Power Sector Report

Alchemist

Administrator
Staff member
#1
Abandoned Power Plant a $38 Billion Warning Sign for India Banks

The report was first published in April 2018.

Banks stare at $38 bn new dud loans from power sector: Report

"Of the $178 billion (around Rs 11.7 trillion) of debt of the power sector, $53 billion (around Rs 3.5 trillion) are already under stress (primarily to the generation sector) and of this, as much as $38 billion (around Rs 2.5 trillion) have the potential of being written- off as bad loans," the Bank of America-Merrill Lynch report said today.
Of this $178 billion debt mountain, banks have the largest at 53 per cent of the total loans, followed by non-banking finance companies (NBFCs) at 35 per cent and the balance from the states.
No wonder REC is trading at PE of 4.6 and dividend yield of 8.9%. The market knows what is coming.

If the report is indeed accurate, PSU banks' worst troubles are yet to come and even the government is going find it hard to keep the banks afloat.
 

paran

Active member
#2
Hi Alchemist,


I would like to know about the PTC India Financial services.

Currently trading at ~Rs:16 whereas it's book value is 38 with the dividend yield ~10%.

Say if there are defaults doesn't it worth the book value too? I guess NPA won't be 100% and if it grows to say 20% still isn't it a good investment at the current price?

What do you think? How to value their business if the book value doesn't have any meaning?
 

Alchemist

Administrator
Staff member
#3
Say if there are defaults doesn't it worth the book value too? I guess NPA won't be 100% and if it grows to say 20% still isn't it a good investment at the current price?
The equity of a financing company is usually a fraction of the total assets.

If the assets deteriorate by that fraction or more, the entire equity of the company is wiped out.

Finance companies' assets are mostly financed by debt and not equity.

PFS is not highly leveraged like banks, but still 20% NPAs would be a disaster.

In case of PFS, as per FY 2017 balance sheet, the company had Rs 2419 crore of networth and total assets of 10752 crore.

A complete write-off of 20% of the assets will mean a reduction of the book value (networth) by Rs 2150 crore. There won't be much "book value" left after that.

I am still unsure about the composition of PFS' loan book. I need to look at PFS' annual reports and other reports before I can comment more on the stock.
 

paran

Active member
#4
Hi Alchemist,

Continuing with the PFS discussion.

I would like to clarify few things.

Their "reserves and surplus" {based on statement of financial results for the year ending March 31, 2018 } is ~Rs:1700Cr.

The market cap is around ~1000Cr.

(or Current net Asset value is ~Rs:900cr)

Is correct comparing these figures?

I went through their recent concall report.

Their MD & CFO claim that PFS's capital adequacy ratio is 21%.
Their gross NPA is 6.5% and resolution is on progress on some of the stressed assets. Around Rs:850crs is their NPA.
They expect it to have a clean slate in Q1 or max by Q2 in this financial year.

Looking at these numbers do you think at the current market price (i.e. ~Rs:16) is it good to invest?
 

Alchemist

Administrator
Staff member
#5
Hi Alchemist,

Continuing with the PFS discussion.

I would like to clarify few things.

Their "reserves and surplus" {based on statement of financial results for the year ending March 31, 2018 } is ~Rs:1700Cr.

The market cap is around ~1000Cr.

(or Current net Asset value is ~Rs:900cr)

Is correct comparing these figures?

I went through their recent concall report.

Their MD & CFO claim that PFS's capital adequacy ratio is 21%.
Their gross NPA is 6.5% and resolution is on progress on some of the stressed assets. Around Rs:850crs is their NPA.
They expect it to have a clean slate in Q1 or max by Q2 in this financial year.

Looking at these numbers do you think at the current market price (i.e. ~Rs:16) is it good to invest?
"Reserves and surplus" are not assets but liabilities in a balance sheet. This entry is a "source of funds" and not an "application of funds".

PFS is a quasi-PSU and hence its future NPA estimates can be very inaccurate.

I still haven't looked at the company's assets in details.
 
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