Energy sector plays a major role in the development of a country. Despite adding huge capacities in power generation; India still faces supply deficit. This is partially on account of raw material constraints and also because of distribution losses. Nonetheless, India's power generation capacity needs to be augmented further before the demand-supply mismatch is completely met. Power sector is a capital intensive sector which often faces financing hitches. To overcome these constraints, some Non-Banking Finance Companies (NBFCs) have been founded. These companies are focused mainly on providing financial assistance to power and allied sectors.

Power Finance Corporation Limited (PFC) is one such NBFC classified as an Infrastructure Finance Company (NBFC-ND-IFC), and is incorporated with an objective to provide financial resources and encourage flow of investments to the power and associated sectors, to work as a catalyst to bring about institutional improvements in streamlining the functions of its borrowers in financial, technical and managerial areas to ensure optimum utilisation of available resources and to mobilise various resources from domestic and international sources at competitive rates.

The company was conferred the status of Navratna by the Department of Public Enterprises (DPE) in 2007, and is a Government of India (GoI) entity, who has a well-established relationship with State Governments, regulatory authorities and major power sector organisations, Central and State power utilities, as well as private sector power project developers. The company has thus far expanded its projects that represent forward and backward linkages to the core power sector projects, including procurement of capital equipment for the power sector, fuel sources for power generation projects and related infrastructure development.

The company being an NBFC and classified as an Infrastructure Finance Company (IFC) in 2010, enables them to effectively capitalise on available financing opportunities in the power sector in India and as a Government owned company, loan made by them to Central and State entities in the power sector, are exempt from Reserve Bank of India's (RBI's) prudential lending (exposure) norms (which are otherwise applicable to non-government owned entities in the power sector). Having said that the company strives to lend to Central and State entities in the Indian power sector by following prudent lending norms and guidelines approved by the Ministry of Power (MoP). Likewise for lending to non-Government entities in the power sector, it follows the norms stipulated by the RBI.

Business Analysis

PFC provides various services and financial products like Project Term Loan, Equipment Lease Financing, Discounting of Bills, Short Term Loan, and Consultancy Services etc. for various power projects in generation, transmission, and distribution sector as well as for renovation & modernization of existing power projects to generate revenue.

Apart from funding, PFC is also entrusted the responsibility to exploit new opportunities in the area of consortium lending, lending to capital equipment manufacturers and fuel supply projects and related infrastructure development projects, renewable energy and Clean Development Mechanism (CDM), and equity funding.
 

Highlight of the Issue

Issuer	Power Finance Corporation Limited
Issue Size	Rs. 750 cr (Base Issue Size) with option to retain oversubscription upto the shelf limit (being Rs. 3875.90 cr)
Nature of the issue	Public issue of Tax Free, Secured, Redeemable, Non-Convertible Bonds of Face Value of Rs 1,000 each.
Credit Rating	""CRISIL AAA/Stable" by CRISIL, "CARE AAA" by CARE and "[ICRA]AAA" by ICRA
Issue Opens	October 14, 2013
Issue Closes	November 11, 2013
Issue Price	Rs 1,000 each bond
Tenure	Tranche I-Series 1- 10 years, Series 2- 15 years, Series 3- 20 years
Coupon rate	Tranche I-Series 1- 8.18% p.a.; Series 2- 8.54% p.a.; Series 3- 8.67% p.a.
Additional Rate	0.25% shall be paid to original Allottees of category IV**
Interest Payment	Payable Annually Only
Min. Application	5 Bonds (Rs 5,000) and in multiples of 1 bond thereafter
Mode of Holding	Physical and Dematerialised Both
Listing	BSE
Depositories	NSDL and CDSL
Debenture Trustee	IL&FS Trust Company Limited
Registrar	M/s Karvy Computershares Pvt. Ltd
Quota	Upto 15% for Category I investors; Upto 20% for Category II investors; Upto 25% for category III investors*; Upto 40% for category IV investors**
	* Resident Individual Investors and Hindu Undivided Families through the Karta applying for Bonds aggregating more than Rs. 10 lakhs across all Series of the bond issue
	** Resident Individual Investors and Hindu Undivided Families through the Karta applying for Bonds aggregating upto and including Rs. 10 lakhs across all Series of the bond issue

(Source: Issue Prospectus, PersonalFN Research)  

OUR VIEW:

PersonalFN is of the view that PFC tax-free bond provides a good investment opportunity as the rates offered are quite decent. Moreover, there's no restriction on a bondholder to hold bonds mandatorily for a particular period of time. Investors may sell or buy these bonds anytime on the exchanges, provided that in such a case they are held in a dematerialized mode. Hence investors need not worry much about liquidity in case of immediate need for funds.

The ticket size has been purposefully kept lower for greater retail participation and thus it is well within the reach of retail investors. Further, the quota of 25% and 40% reserved for HNI and retail investors respectively enhances the chances of getting allotment. For category IV investors, i.e. for those who invest less than or equal to Rs 10,00,000, incentive of 0.25% is being offered over and above the coupon rate. For a person who invests as a category IV investor and falls in the maximum tax bracket, the gross pre-tax yield comes in the range of 12.20%, 12.72%, and 12.91% for bonds with maturity profile of 10, 15 and 20 years respectively. Likewise for HNIs placed in the highest tax bracket the pre-tax yields are 11.84%, 12.36% and 12.55% for bonds with maturity profile of 10, 15 and 20 years respectively.

We believe that PFC tax-free bond is an attractive offering considering the highest credit rating and competitive yields (compared to post tax yield on other fixed income instruments) for those in the maximum tax bracket.


In case you wish to invest in the above instrument, you can email us at info@personalfn.com or contact us on 022-6136 1200

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