Power Finance Corporation

 PFC is likely to book a large MTM forex loss in 2Q12 due to unhedged foreign
currency liabilities and sharp adverse movement in the INR exchange rate.
However over the longer term the unhedged exposure may actually turn out to
be positive for the P&L of the company.
Impact
 2Q12E MTM hit large. PFC has Rs50bn of foreign currency liabilities, out of
which 86% is unhedged. We think the hit in 2Q12 due to adverse movement
in the Yen and USD compared to the Indian rupee (INR) could be as much as
Rs5bn or ~50% of estimated pretax profits for the quarter.
 Larger hit due to Yen movement. Nearly 60% of the loss is likely to come
from Yen appreciation to INR of 15% in the quarter. Yen denominated
borrowings make up 48% of PFC’s total forex borrowings. USD denominated
borrowings make up another 49% of borrowings, with the USD having
appreciated 9.5% in 2Q12. Remaining borrowings are in Euro.
 MTM hits non-cash- significant repayment only in 2014/15. Bullet
repayments for three loans amounting to ~USD800m are due only in FY14/15.
These are basically loans that have been drawn by PFC in 2009 and 2010
and are of a 5-year duration.
 PFC may profit from unhedged liabilities in the long term. However, the
company’s decision to keep liabilities is likely to be profitable in the long term.
We expect the INR to appreciate another 4% from Sep 2011 to March FY12
and another 7% beyond that to March FY14. Over the life of a loan which is
due in FY14, the INR would have appreciated ~8% versus the USD. We
expect the INR to appreciate against the Yen as well from current levels.
 Current management policy is of keeping open positions of up to 30% of
networth. The company’s current policy is to keep forex liabilities up to 30%
of networth as unhedged. So far it does not see any need for revisiting the
policy as the repayments are far in the future and it expects the rupee to
appreciate from hereon.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs190.00 based on a Gordon Growth methodology.
 Catalyst: Improvement in regulatory environment
Action and recommendation
 We maintain our Outperform on the stock.