Rs 90,000 cr discom package: Street anxious over impact on PFC and REC

While state government guarantee offers comfort, operational inefficiency may continue to impact debt servicing ability of electricity distributors, say experts; the two stocks are down 10-13 per cent

The central government’s Rs 90,000-crore stimulus to help power distribution companies (discoms) clear dues may trip the two state-owned financiers for the sector — Power Finance Corporation (PFC) and REC — which have been asked to give the loans.

While the package is aimed at easing the working capital pressures of discoms and power generation companies, the Street feels PFC and REC have been forced to carry the burden, and has punished the two stocks. Prices are down 10-13 per cent since May 13 since the stimulus announcement. This is more than twice the 3.7 per cent fall in Sensex during the same period.
 

Some say the package will ensure strong growth in the loan books of PFC and REC at a time when the overall credit demand is muted. However, the devil lies in the detail, as well as the track record.

Though the loans will be guaranteed by state governments and will help power generating companies recover their dues from discoms, the operational inefficiency of public-sector discoms is a worry for the industry, and is also making investors of PFC and REC uncomfortable, say experts.
 

The bad loan cycle of the power sector, they say, is unlikely to end unless the operational efficiency of discoms improves.
 

Devendra Pant, chief economist at India Ratings, says: “Though there is near-term respite from the government,  the debt servicing ability of discoms would remain a concern till the efficiency of the power sector improve,.”
 

Even under the earlier scheme, UDAY, launched in 2015, very few discoms turned profitable. In fact, after that scheme, discoms again became bankrupt and were bailed out by PFC/REC as a part of the economic package, highlights a recent report by Bernstein Research.

UDAY is not the first major reforms package for the power sector. In 2003, too, the central government had announced major reforms to improve the viability of the sector, especially distribution.

Asutosh Mishra, head of research at Ashika Stock Broking, says, “While the state governments’ guarantees offer relief, the main concern is that there would be a pile-up in non-performing assets, or bad loans, for PFC and REC, albeit temporary. This would dent earnings given the overall financial situation of the power sector.”

While government guarantees will ensure recovery of loans to discoms, the probability of delay in recovery remains, which could put pressure on the balance sheet of the two lenders.
 

Experts say there is history of late servicing of dues by discoms, which in turn impacts power generation companies and the entire power sector supply chain.

Pant says it is important that state governments pay their dues, such as power subsidies, on time.
 

Also, the huge amount of Rs 90,000 crore, which is over 14 per cent of PFC and REC’s combined loan book as of December 2019, is expected to be lent at a low rate, limiting their profitability.
 

Analysts estimate the spread on the loans to be around 1.5 per cent compared to the existing spread of around 3 per cent, according to December 2019 quarter numbers.