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Power Finance Corp. Ltd (PFC) has little reason to worry about the project pipeline, with its net outstanding approvals at Rs 1.83 trillion.

All it has to do is lend money at favourable interest rates and hope that the assets won’t turn bad. The company is doing the first part of the job rather well.

Disbursements increased by more than one-third and interest income jumped 46% to Rs 1,229 crore as the firm squeezed more out of its loan assets in the fourth quarter. For the whole of last fiscal it disbursed 21.4% more loans.

Low finance costs and better yields improved the interest spreads from 2.1% to 2.33%, which in turn led to a 33 basis points expansion in net interest margin to 3.88%. A basis point is one-hundredth of a percentage point. Strong operating performance drove PFC’s profits up by 35% to Rs 818 crore.

The firm wants to disburse Rs 43,000 crore this fiscal. That’s up 6.2% over the previous year, but slower than the 21% growth it registered in fiscal 2012. But the strong approval pipeline will give it headroom to speed up lending. Also, a quarter of the company’s borrowings are dependent on floating rates.

The easing of policy rates and a strong credit rating should also help PFC keep interest costs in check, and help sustain margin expansion in the coming quarters.

The other part of the business is asset quality. Fuel scarcity and problems in getting regulatory nods for projects have precipitated asset quality concerns. From Rs 231 crore in fiscal 2011, PFC’s bad loans increased to Rs 1,358 crore last fiscal; non-performing assets widened from 0.2% to 0.93%.

The firm is lending only to projects that have secured fuel supplies and power purchasing pacts. That will help avoid future bad loans. But concerns about asset quality are emanating from previous loans.

Power generation constitutes 83% of the Rs 1.3 trillion in loan assets. As projects are getting delayed due to lack of fuel, there are fears that some of these loans will turn bad. The management is putting on a brave face, though.

Chairman and managing director Satnam Singh said he’s seeing improving trends and does not expect any loan to turn bad if Coal India Ltdsupplies 80% of fuel needs.

“If that much coal is supplied, there won’t be any defaults,” Singh said while releasing the company’s fourth quarter results.

The other issue plaguing PFC is its exposure to state electricity boards. About 12% of its loans went to transmission and distribution firms. Many state boards recently hiked tariffs and have begun to set their finances in order.

But analysts fear PFC might see loan restructuring and delayed payments. Even if the margins continue to remain firm, asset quality concerns are weighing on the stock, currently trading at its book value of Rs 148 per share.

Compared with the 6% rise in the BSE-100 index, the PFC stock has gained 11% since the beginning of this year.

Also See | Quarterly performance (PDF)

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