PFC, REC shares plunge on discom rehab plan

The government’s rehabilitation plan for power distribution companies (discoms) hit shares of companies that fund electricity projects such as the Power Finance Corporation (PFC) and Rural Electrification Corporation (REC).

Investors exited these counters on fears that their profitability will take a beating on government’s decision to transfer discom’s liabilities to state governments. Shares of PFC fell nearly eight per cent to Rs 232.25, while that of REC dropped 11 per cent to Rs 237.1. The benchmark BSE Sensex in comparison fell 0.15 per cent to end at 26,265.24.

The government, on Thursday, after market close, approved a plan to reorganise about Rs 5 lakh crore of debt at discoms, or state electricity boards (SEBs), in a bid to turn them profitable in three years.

The plan will allow state governments, which own the retailers, to acquire over two years 75 per cent of their stakes by selling bonds. “In a scenario that most states accept this package, we believe PFC/REC’s loan book will shrink over the next one-two years, as SEBs repay short-term/transitional finance loans (19 per cent of PFC’s and 11 per cent of REC’s loan book),” said Kotak Institutional equities in a note.

“SEBs will likely seek a lower rate on capex loans to PFC/REC (three per cent of PFC and 21 per cent of REC’s loan book) or repay these loans depending on the ability of SEBs to raise debt from bond markets,” it added.

The recast will reduce the interest cost to about nine per cent from as much as 15 per cent, according to a government statement released on Thursday.

 “The plan to turn state-run power distribution utilities profitable may lead to the conversion of some of the loans owed to power financiers to bonds, impacting their returns on equity. Typically, bonds offer returns that are 400-500 basis points below the loans and this can affect the profit of power financiers,” said Amit Jain, analyst, Asian Markets Securities.

The price of the bonds will be determined in consultation with the Reserve Bank of India and will be linked to government bonds.  “If power financiers convert their loans to bonds, the lower returns will narrow their net interest margins,” said Punit Srivastava, deputy head of research, Daiwa Capital Markets.

The Kotak report said earnings of PFC and REC might reduce by up to 20 per cent, which could diminish their returns on equity to 14 per cent over the medium term from over 20 per cent in FY15.

The brokerage has not yet cut its price target on PFC and REC as it awaits more clarity. Kotak’s price target for PFC is Rs 300 and REC is Rs 350.