Power Finance Corporation (PFC) is entering the capital market on 10^th May 2011, with its further public offer (FPO) of 22.96 crore equity shares of Rs.10 each, in the price band of Rs. 193 to Rs.203 per share with a 5% discount to retail shareholders and employees, leading to effective upper price band as Rs. 192.85 for these two investor buckets. The FPO comprises a fresh issue of 17.22 crore shares while the offer for sale is of 5.74 crore shares, representing 15% and 5% of present equity share capital respectively. The issue, a 17.39% dilution, closes on 12^th May for QIB bidders and on 13^th May for retail and HNI investors.

The FPO will mop-up Rs. 4,578 crore, of which, Rs. 1,145 crore will go into the Government kitty to kick-off FY12 divestment process to achieve annual target of Rs. 40,000 crore. Also with this FPO, Govt.'s divestment receipts which currently stand at Rs. 99,739 crore, will cross the Rs. 1 lakh crore mark for the first time. Balance Rs. 3,434 crore raised through the FPO will help the company improve its capital adequacy ratio to 19%-plus levels, from 15.94%, as of 31^st March 2011.  

The company, being India's leading power sector financer, clocked Rs. 10,128 crore of total income in FY11, on a standalone basis, earning net profit of Rs. 2,619 crore and net margin of 25.9%. It has a very strong assets book as depicted by gross NPAs which stood at very low levels of Rs. 13 crore, as of 31^st December 2010, amounting to barely 0.01% of gross outstanding assets. Company's FY11 EPS amounted to Rs. 22.82, on equity of Rs. 1,148 crore.

The networth of the company, as of 31^st March 2011, stood at Rs. 15,412 crore which will rise to about Rs. 18,900 crore, post FPO, as equity will rise to Rs. 1,320 crore. Government holding which stands as high as 89.78% as of 31^st March 2011, will decline to 73.72% post FPO, thereby increasing its non-promoter holding to 26.28%, which may make the company eligible to be included in the Sensex or CNX Nifty indices, as its free-float market capitalization will increase significantly.

Among the listed companies, REC is a good peer comparison, given their size and PSU profiles, although REC's profitability is better in relative terms vis-a-vis PFC. REC posted total income of Rs.6,068 crore and PAT of Rs. 1,870 crore for nine months ended 31^st December 2010, indicating FY11 expected total income and PAT of Rs. 8,225 crore and Rs. 2,535 crore respectively, earning net margin of 30.8%, as against PFC's net margins for FY11 at 25.9%, i.e. REC's net margins are a good 490 basis points higher. REC's return on assets is also higher at 3.8% versus 2.9% for PFC during FY11.

Even on the valuation sphere, REC is ruling more attractively with a PE multiple of 8.65x and a PB multiple of 1.61 times, expecting BVPS of Rs. 138 as of 31^st March 2011. In contrast, PFC's FPO price of Rs. 203 (at upper band) is discounting FY11 earnings by 8.90 times. PFC's BVPS as on 31^st March 2011 stood at Rs. 139, indicating price-to-book multiple of 1.46x, based on price of Rs. 203 per share.   

The FPO price band offers less cushion against the volatile stock price, given Monday's closing price of PFC at Rs. 211, but retail investors do have a small margin potential to earn about Rs. 10 to Rs. 15 per share, as listing gains, net-of-discount. However, for HNIs, this FPO does not hold any promise in the near term, but must have a longer horizon of 3 to 6 months, wherein it may reward, as happened in the case of REC FPO in the past. Since PFC's public float will rise substantially post this FPO, near term downward pressure on stock price is imminent. Moreover investors' apathy for power stocks and hardening interest rates in the near term are seen some concern for the stock.

Thus, the FPO is attractive only from the medium term point of view, as current share price near its 52 week low, without much excitement on listing gains for HNIs, while a nominal single digit listing gain may accrue to retail investors, thanks to the 5% discount offered to them.