Power Finance Corporation Limited (PFC) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Power Finance Corporation Q2 FY '26 Earnings Call, hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Abhijit Tibrewal from Motilal Oswal. Thank you, and over to you, sir.

Yes. Thank you, Danish. Good afternoon, everyone. I am Abhijit Tibrewal from Motilal Oswal, and it is our pleasure to welcome you all to this earnings call. Thank you very much for joining us for the Power Finance Corporation call to discuss their Q2 FY '26 earnings. To discuss the company's earnings, I am pleased to welcome the senior management team at PFC, represented by Ms. Parminder Chopra, Chairman and Managing Director; Mr. Rajiv Ranjan Jha, Director, Projects; Mr. Manoj Sharma, Director, Commercial; Mr. Sandeep Kumar, Director, Finance. On behalf of Motilal Oswal, we thank the senior management and the Investor Relations team of Power Finance Corporation for giving us this opportunity to host them today. I now invite CMD ma'am for her opening remarks, post which, we will open the floor for a Q&A from the participants on this call. With that, over to you, ma'am.

Thank you very much. Good afternoon, everyone, and a very warm welcome to all of you. We have declared our Q2 and H1 '26 results today. I'm happy to connect with all the investors today to discuss PFC's performance. Starting with the consolidated performance. For H1 '26, the consolidated profit after tax stood at INR 15,816 crores, a 17% increase on a year-on-year basis. The group loan asset book registered a 10% growth on a year-on-year basis and is at INR 11,43,370 crores as on 30th of September 2025. On the asset quality front, we continue to see a declining trend in the NPA level. The consolidated gross NPA level for H1 '26 is at 1.45%, and net NPA is at 0.30%. Now coming on to the stand-alone performance. I'm happy to share that in H1 '26, our loan book -- loan asset book registered a 14% growth. With this, our loan asset book is now at INR 5,61,210 crores. The growth was driven by strong disbursement of around INR 86,000 crores, which is a 30% increase from previous half year. Out of the total H1 disbursement, about 57% were in Distribution segment and 30% were in Generation segment, which includes a mix of renewable and conventional generation projects. For FY '26, we continue to maintain our loan book growth guidance of 10% to 11%. On the lending business front, I would like to share that the vision to expand our footprint, PFC entered into its first ever cross-border financing deal in Bhutan with a special approval of Reserve Bank of India. It's INR 4,800 crores deal for financing 600-megawatt Khorlochhu Hydro Power Limited. The lending would be dominated in rupees. The project is a strategic partnership between Bhutan government on Druk Green Power Corporation Limited and start up our company with 60% and 40% shareholding, respectively. Now, I would like to share highlights on PFC's financial performance. I'm pleased to inform that for H1 '26, we have delivered a net profit of INR 8,960 crores versus INR 8,088 crores in H1 '25. This was mainly led by 23% year-on-year growth in net interest income. The net profit for Q2 '26 is at INR 4,462 crores. Continuing with the endeavor to share our success with the shareholders, the Board has declared an interim dividend of INR 3.65 per share. With this, the cumulative interim dividend for FY '26 stands at INR 7.35 per share. Now coming on to our key financial indicators. The yield for H1 '26 is at 9.98%. The cost of fund is at 7.43%. The spread and NIM continue to be within our guided range at 2.55% and 3.62%, respectively. We continue to maintain comfortable CRAR levels quarter-on-quarter. As on 30th September 2025, our CRAR is at 21.62%, with Tier 1 capital at 19.89%. The CRAR is well above the minimum regulatory requirements. Now moving on to the asset quality. I'm happy to share that the net NPA ratio is at the lowest level in last 10 years and is at 0.37%. Owing to resolution of KSK Mahanadi in last financial year, our gross NPA levels have declined by 84 bps from 2.71% in H1 '25 to 1.87% in H1 '26. With this, now our Stage 3, that is NPA book, is at INR 10,490 crores, with healthy provisioning coverage of 80%. On the resolution status, I would like to share that currently, we have 22 stressed projects of INR 10,490 crores in Stage 3. Out of these 22 projects, 11 projects, worth INR 8,470 crores, are being resolved under NCLT, of which 6 projects of INR 2,600 crores are under liquidation, on which 100% provisioning is being maintained. On remaining 11 projects of INR 2,015 crores are being resolved outside NCLT. Now, I would like to share an update on one of the major stressed asset, which is Sinnar Thermal Power, which is an outstanding of INR 3,000 crores. It's a 1,350 megawatt coal-based plant. This project is being resolved under NCLT, and the resolution plan has been submitted for NCLT approval. Currently, 80% provisioning is maintained on this project. Now, moving on to the borrowing side. As on 30th September 2025, our outstanding borrowing is at INR 4,74,430 crores. Out of this, around 20% of the outstanding borrowings are foreign currency borrowings. As on 30th September 2025, outstanding foreign currency borrowing is at USD 10.4 billion, out of which 68% is U.S. dollar-denominated, 19% JP yen and 11% in euro. We continue to maintain 95% hedging on the total foreign currency portfolio for exchange risk. Now, I would like to discuss the movement in the exchange gain/loss line item in profit and loss. In FY '26, we saw exchange loss of around INR 1,100 crores on our unhedged portfolio and also on some portion of the derivative book. The loss was primarily due to movement in euro-USD exchange rate, wherein euro has appreciated against U.S. dollar by around 8% in H1 '26. Further, in case of positive exchange rate movement, we would have the opportunity to reverse these losses as the loans have long-term maturity. Also, currently, in the last few days, we are seeing a positive euro-USD movement. I would like to share that we remain fully focused on actively managing our ForEx exposure to ensure resilient financial performance. Also, on the foreign currency borrowing front, I'm happy to share that in H1 '26, we executed 2 milestone agreements to further strengthen PFC's support for India's energy transition. We signed JPY 60 billion loan agreement with JBIC to fund a bamboo-based bioethanol project in Assam. We also partnered with Export Finance Australia, raising USD 180 million for clean energy projects, marking EFA's first financing initiative in India. These collaborations highlight our commitment to diversify global funding sources and accelerate India's clean energy journey. I would like to highlight that PFC continues to be the largest renewable sector financial in India with a renewable loan book of INR 84,680 crores as on 30th September 2025. Now, before I close, I would like to share some updates on the recent RBI circulars. The first one is with respect to RBI's project financing direction, which was issued in June 2025. These directions are now effective from 1st of October 2025, on new project loans sanctioned on or after this date. The existing loans will continue to be guided by the earlier norms, unless there is a fresh credit event or a material change in terms, in which case, the new guidelines will apply. As per these directions, provisioning of 1% is required to be maintained during construction phase and 0.40% during the operational phase after commencement of repayment of interest and principal. I would like to share that PFC, on an average is maintaining provisions of around 1.01% on its Stage 1 and Stage 2 assets. Accordingly, the current provisioning levels are more than the statutory requirement. Further, for the purpose of provisioning, we follow expected credit loss model. Therefore, any incremental provisioning required under RBI norms, over and above the ECL model, will be created through impairment reserves without impacting the profit and loss account. The second update relates to the draft circular released by RBI on 24th of October 2025, regarding the applicable risk rates for infrastructure exposures of NBFCs. The draft circular prescribes the methodology for assigning risk weights on the infrastructure assets for the CRAR calculation purposes. The circular is applicable from next financial year, that is 1st of April 2026, and would be applicable on the outstanding loan portfolio. Unlike the current simplified framework, this draft introduces a more detailed approach to classify projects as high-quality infrastructure assets eligible for lower risk weights. In the current framework, 50% risk weight is applicable for eligible commissioned infrastructure projects, which are in existence for over a year of commercial operations. However, in the draft framework, risk weight is now split into 2 slabs of 50% and 75%. The split is based on the percentage of amount repaid and other various conditions, which is not there in the extent regulation. I would like to share that our loan book covers projects across generation, transmission, distribution and other infrastructure segments. So we are currently reviewing the draft circular in detail to understand its implications across different portfolios. As always, we will continue to keep our investors informed as we gain further clarity on this and we receive the final guidelines from Reserve Bank of India in this regard. With this, I would like to close my remarks. Thank you, once again, for joining us today. We can now have the question-and-answer session.

[Operator Instructions] Our first question comes from the line of Shreepal Doshi from Equirus Capital.

My first question was pertaining to one of the exposures, Kaleshwaram project -- irrigation project. So I wanted to understand, how have we sort of accounted for the same? Have we not seen some rundown or prepayments from this exposure? And what was the total exposure?

Till now, we have not received any prepayments from the Kaleshwaram Project. Our exposure is approximately INR 26,000 crores.

Okay. So ma'am, we will see prepayments, or let's say, some prepayment coming in 3Q from this exposure?

Right now...

Repayment is already happening.

Normal repayments are happening, but we don't have any request from the borrower for prepayment of this portfolio.

So it is -- it remains in, let's say, Stage 2 for us. And unlike our subsidiary, we will not -- we've not seen any prepayment request from them coming in.

Yes. Till now, not.

Got it. Got it. And ma'am, the second question was pertaining to -- in our filing in Note 6, we have highlighted a fraud amounting to -- closer to INR 262 crores. So what is this exposure, if you could just throw some light?

Yes. I think we have -- in the last quarter, we have clarified that it was primarily on account of Gensol exposure, which we had.

Okay. Okay. Got it. Got it. And the last question was pertaining to the incremental yield for the quarter. So have we seen some moderation there, let's say, versus what our blended yield was in 1Q? And what is the same in 2Q? Have you seen some moderation there? And if you could highlight the number that would be great.

In the yield, I think we have marginally dipped, and that was due to the market forces and the competition, which we are facing. It was marginally from 10.01% to 9.98%.

Our next question comes from the line of Shreya Shivani from Nomura. As there are no response from Shreya, we'll move forward to the next participant. Our next participant is Raghu from Travest Capital.

My question is regarding the net transaction, the -- whatever the ForEx loss which we are having. This quarter, it has been around INR 400 crores -- INR 650 crores, and previous quarter, it's something around INR 500 crores. Don't you feel this is just too much amount of transaction loss we are facing? For 2 quarters, we have raised around INR 100 crores for an exposure of INR 90,000 crore book. So one first part of the question is, do we expect some write-back if suppose the ForEx improves favorably towards us? Second is, in the previous con call, you have mentioned saying for every rupee, the loss is something around INR 250 crores, but we see it is substantially more than that. So can you please give an idea of the present loss and the future, what is going to be for the next 2 quarters?

Because of the uncertainty, which is there and the weakening of the dollar, we have seen that euro appreciating a lot. There has been -- euro has appreciated to approximately 8% during the half year. So what we expect -- and this is primarily the major amount is towards the strengthening of the euro. But I would like to mention that in case of euro, we have longer maturities, which is starting from 4 to 5 years and going up to 8 to 9 years in a few of the multilateral loans. So in such cases and with the strengthening of the dollar in the near future, we are expecting that these losses will be reversed gradually from quarter-to-quarter.

Okay. So it is not that it's a booked loss and that nothing can be recovered. So in the next few quarters, there is a possibility we can recover something back, right?

Yes. Right. Once we have the positive movement in the -- in favor of rupee versus euro, then these will be reversed.

Sure. The second question of mine is regarding -- please, again, excuse me if I'm raising one of your competitors' name. We have heard from the news that IRFC has gone now into infrastructure lending, and they are lending with a spread of around 120, 130 basis points. So do you foresee any competition for us in this particular segment and some pressure for us in our NIMs?

See, there has been -- definitely, I agree that there has been competition on various fronts. Earlier, we have competition with the banks. Now, we have been competing with -- IRFC is there, HUDCO is there, and we have seen NABARD also funding for a few assets in the power sector. And the NaBFID is also there. So there is definitely competition in the market, but I would like to state, but there is enough scope for business for each one of us to grow. So yes, we have to see that how competitive we can be, but till now, we are expecting that we will be able to maintain our spreads and margins.

Okay. Sure. And any chance for us to pick in our growth in the loan book, if suppose there is so much opportunity, because 10% to 11% somehow feels too low? So is there any chance we can raise it to 14%, 15%? Maybe a broader long-term outlook is what I'm looking for.

I think with a number of -- a lot of routine repayments also, even if we have to grow at 10% to 11%, we have to disburse around INR 2,00,000 crores. And to grow at a base of last year, INR 5,41,000 crores itself is a huge amount. We would like to be prudent in our approach in lending. So that is how we have given the guidance of 10% to 11% for the growth in the loan book.

For the next few years, do you foresee any improvement there, acceleration there in the loan growth? I'm talking about 3 to 5 years.

More your base is growing, you can very well understand that the more pressure on the disbursement and because of the repayments also which is happening. On an average, we have prepayment to the tune of INR 85,000 crores to INR 90,000 crores every year right now as on date, if we say. So it's a huge amount, which we are talking about the disbursement.

Now, what is the nature of this repayment, ma'am, if maybe you can clarify? Why are we having so much amount of repayments?

It's a routine repayment of our loan assets.

Okay. That means we have to look for a new customer each time or -- that is my question. The same customer we are lending it, or what is the exact nature of the transaction of repayment?

See, it's -- basically, once you lend, we lend for a period of 15 to 20 years and with a staggered maturity. So after the moratorium, we get some amount repaid every year. So the -- it all depends on the new loan assets, which are being funded. It could be with the same customer or it could be with the new customers also.

Okay. Sorry, one last question, ma'am, just adding to this. Suppose we are lending to a project for about 10 years or something, why will we get a repayment at second year or third year? The customer just pays us the interest and maybe a very marginal maybe amount of repayment, right? Why is it so high, almost 20% of the loan book?

See, we are -- what we are doing is we are doing a project funding. So it has to match with the revenue structure of the project; otherwise, we will be putting our assets at risk. So we have to stagger the maturities to match with the revenues of the project, and that is how the repayment structure is being decided. It's on an average 5 years, but there are a few fundings, which we have done 10 years back for which the repayment is continuing. There is the current funding, which may start -- for which the repayment might start maybe after 3 to 4 years. So it's an -- on an average funding is of 5.5 years asset profile -- around 6 years is the asset profile.

Our next question comes from the line of Sarvesh Gupta -- [Operator Instructions] Sarvesh Gupta from Maximal Capital.

So first question is that the return on equity that we are earning is almost like 20%. And I think a few quarters back, we were growing at a much more healthier pace. But now the pace of growth has come down to 10% or 11%. So given that situation, now we have excess equity in the balance sheet, which can ideally be utilized for higher dividend payout ratio. So have you thought on those terms because now the growth rate is no longer going to be around 15%, 16%, but more like 10%, which is half the incremental profits that we are earning?

See, the profit, what we are earning is we have been paying a dividend at a rate of around 30% of our profit after tax. So for an NBFC, I think we need profit to be added to our retained earnings for growth also because we have to maintain a capital adequacy. You know that the mandatory capital adequacy requirement is around 15%. So with the higher -- as I already said, with a higher base, we have to disburse around INR 2,00,000 or you can say around maybe if INR 5,40,000 crores is there, INR 54,000 is the incremental assets we need to book. On INR 54,000, you can very well work out how much capital I require to maintain a sufficient capital adequacy. So maintaining a balance between the investors' return on their capital and as well as the growth of the company, I think we are distributing the dividend, and we expect that 10% to 11% growth is -- will be -- we will be able to maintain for the years to come.

Okay. And second question, ma'am, so basically, as both you and the subsidiary have started moving more towards renewable power funding. And there, I think the tenures are lower and the asset is getting operationalized earlier, and then, the bank transfer or something is happening because of the -- which the prepayment rate has increased. So -- I mean, going forward, are we also putting some terms in our agreement -- in our loan agreement, which can lead to sort of lower prepayments because, as I see the numbers, the major reason why the loan book growth has come down is not because of disbursements, which are actually growing quite healthy, but because the prepayments is increasing at an even faster pace than the disbursement growth. So are there some ways to arrest the prepayment or not?

See, I agree with you that we are trying our best to arrest the prepayments in our loan book, but the terms and conditions are to be in line with the market expectation. If any of the borrower is getting better terms and conditions from any other borrowers, so they would like to choose that -- sorry, lender -- so they would like to choose that lender. So nowadays, the borrowers are very choosy. They would like to negotiate on the interest rate. They would like to negotiate on the terms and conditions. And we as a borrower, if we talk to the banks, we are also negotiating in that direction. So we have to see the market conditions and the expectation of our clients.

Our next question comes from the line of Suraj Das from Sundaram Mutual Fund.

I think I joined a bit late. Sorry if this question is a bit repetitive. Ma'am, there are incrementally news articles saying that there would be some cancellation on the renewable tenders, some sort of 40-45 gigawatt type. So any comments on that, ma'am? I mean -- and if, I mean, this will have any impact on the growth on the renewable side or not?

Yes. There was a news article about cancellation of some allocations made by SECI, NTPC and NHPC, et cetera. But that was where the PPA could not be signed with the DISCOMs. So for us, if I say precisely, we don't have any impact right now because in all our funding, we have PPAs tied up in advance. So I don't think that that's going to impact the present sanctions, which we have in hand.

Sure. So effectively, we are having very minimal, probably, exposure towards unsigned PPA -- I mean, without any PPA exposure, right?

Tell me.

No, no. Sorry, ma'am, go ahead. Sorry.

So generally, wherever PPA is envisaged, it's a predisbursement condition from PFC side to have those PPAs and only then we start doing the disbursement.

Okay. Sure. Understood. And ma'am, last, again, on some of the news article saying that there would be some DISCOM bailout news or some sort of that. I think last time also, 2016-'17, during UDAY, we had some accelerated prepayment. So this time, I mean, if this kind of thing goes ahead, any assessment from your side, what could be your accelerated prepayment on that front?

See, a group of -- a committee of group of ministers have been formed to assess the viability of the DISCOMs. And they are working on the various ways and means, and they have not yet submitted the report. Once we have some clarity on the report, only then we will be able to comment on anything.

Okay. Sure, ma'am. But would it be fair to assume that if this happens, then there would be acceleration...

I'm really sorry to interrupt you, sir. You may rejoin the queue. We have a lot of questions. Our next question comes from the line of [ Kushagra Goyal ].

Firstly, just sort of continuing the last participant's question regarding the DISCOM segment. Even if we set aside some bill or some government action coming in, just wanted to understand how the DISCOM segment growth will look like for us going forward. So I understand that RBPF will be -- sort of we will see higher disbursals and higher repayments. But now that LIS or LPS repayments will start coming, then how does this segment sort of grow? I just wanted to understand that.

See Government of India is working for strengthening of the distribution network across the country along with the respective state governments. And I think with the more and more demand coming in for the power, there is a need to further strengthen. As you are already aware that there is already -- RDSS scheme is going on. And some of the CapEx has been taken up by the state. So we are expecting that going forward also that the CapEx work will be undertaken by the DISCOMs to address their -- basically strengthening of their network. So the LIS, LPS schemes, I agree that they were the only onetime schemes, and sort of LIS, you know that was a bailout package at the time of COVID, and then, LPS was to infuse liquidity into the power sector value chain. But going forward, we will see more and more CapEx coming in, in the distribution sector.

Okay. Got it. Second question was on the margin front. So just wanted to understand, one, from the perspective that as the share of renewable projects increases, will it have sort of negative pressure on our margins? And secondly, how do our margins get impacted by repo rate changes, so if you could give some more color on that?

See, impact of the repo rate change directly, we may not have much, but indirectly, the market benchmark rates moved with any reduction in -- any repo rate cut. So we have seen that in the last year when we were raising the funds through bonds, the yields have dropped from the then 7.30%, 7.38% to current year to 6.7%. So that was the result of the repo cut in the market. And going forward also, if there is a repo rate cut, and the liquidity is improved, we may see reduction in the PFC's cost of borrowing. And ultimately, the cost of reduction and the cost of borrowing temporarily may improve the spread, but on overall basis, we presume that since we will also be passing on to our borrowers, so it is going to be within a range bar.

Okay. Got it, ma'am. And on the renewable segment share increasing, will that have a negative impact?

I don't think that increase in the renewable segment is going to impact our margins and spreads adversely because right now, due to the competitive reason, the transmission, distribution, lending also is at very competitive rate and so is the other conventional generation lending.