Though, typically, I am very sceptical of investing in PSU stocks, this one seems to be a mis-priced opportunity where downside seems to be limited but if things work out, one can get very good upsides. Personally, I like such opportunities as such opportunities provides good margin of safety and typically one is not paying much for growth. Here is my take
)- Uniquely positioned itself as provider of range of financing options across energy value chain. In addition due to the pedigree of parent (PTC) it does understand energy landscape better than its peers. This clearly distinguishes it from other players like IDFC and L&T Infrastructure finance.
)- It's one of the few NBFC qualified as Infrastructure Finance Companies. This status enables it to reduce its borrowing cost due to it's ability to issue tax free Infra bonds and international borrowing as ECB upto USD 500 million. In addition, it can also leverage its PSU status to get borrowing approved from multilateral institutions like IFC
)- It's NII has been consistently and steadily rising since its inception. It's NIM has ranged from 6.09% in 2010-11 to 8.5% in 2012-13. Though, it has declined for 9M FY 2013-14 to 6.93, it is still very decent. NIM also is comparable with leading NBFCs such as STFC, IDFC & L&T Finance for which the NIM ranges from 6.7-7.45% in 2012-13.
)- Company has astutely invested in equity and mezzanine financing which has generated very decent returns. All the exits done by the company has generated good returns. Further monetization of the current equity investment is likely to provide zing to the good performance on debt side.
)- Asset quality seems to be good with net NPA at zero, though 4 years of track record is hardly any indicator for how thing will pan out for next 20 years.
)- Company is provisioning for bad loans at twice the mandatory provisioning norms (0.50%) specified by RBI (0.25%). This is a pointer to not too aggressive accounting policy by the management
)- Increasing focus on renewable sector means faster implementation of projects and hence faster conversion from sanction to disbursement.
)- It's trading at 0.65-0.7 times book and has RoA of above 3%. Hence stock definitely looks cheap.
)- To me "PSU" tag is a one of the largest risk. Any company where management show disregard for minority shareholder's interest shall be treated with extreme care. GoI has shown such disregard on many occasions in the past. If NDA comes to power, hopefully, it will not resort to such actions (going by their past track record and Mr.Modi's record). However, as they say in investing, "hope" is very dangerous thing !
)- As is true for any financial service firm, if company is not able to manage the quality of its assets well, very high leverage of the company (due to inherent nature of its operations) can prove to be disastrous and may wipe out most of the profits.
)- Only 5 years of operating history shall also be considered as risk as company has not experienced full business cycle of boom, pleatau and bust! This means, company and management has to still prove it's mettle and demonstrate consistency and conservatism in years to come. This is an "unknown" for investor and any extrapolation from limited historical data can be dangerous. One has to keep an keen eye on actual performance in the time to come and take necessary actions in case if the performance starts deviating from the one demonstrated in the past.
Overall, I feel, the risk-reward is in favour of an investor and if the company continue to grow at decent growth rate (20-25%, which is a very reasonable target considering it's past track record, size of opportunity and possible revival in infrastructure cycle) and maintains its asset quality, it can yield very good results.