PFC, REC may be close to the bottom

Credit growth, asset quality of companies likely to improve

Share prices of power sector financiers Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) have hit new lows this week after significantly underperforming on the S&P BSE Sensex for the last one year.

The Q3 results were bad, with the companies reporting a yoy decline in net interest income (difference between interest earned and expended) and a double-digit fall in net profit. Going ahead, the pain might be much lower and, if analysts are to be believed, the situation could start looking better. “In the last few quarters, a large part of the stress emanated from known accounts and the total stress pool (net non-performing assets (NPAs) + restructured) fell to 11.5 per cent (13.2 per cent in FY17). Business momentum was steady, with over 10 per cent yoy loan growth. The management maintained its stance of potential up-gradation that will potentially improve performance going ahead,” said Edelweiss Securities’ analysts on REC.

While REC reported an improvement in its loan book, PFC’s performance was disappointing in Q3. Yet, analysts believe the worst may be over for it. Quantum Securities, in fact, sees a 30 per cent upside in the two stocks over the next two years, owing to potential credit growth and asset quality improvement. The brokerage estimates the two companies will clock 12-12.5 per cent credit growth in each of the next two financial years. The confidence also emanates from the Reserve Bank of India's (RBI's) decision to put some public sector commercial banks under prompt corrective action (PCA), which should auger well for both PFC and REC.

“Till date, the RBI has put 11 out of 21 state-run commercial banks under the PCA (a few more are likely to follow) that will restrict them from lending to the power sector (currently perceived to be a risky space). In turn, the share of power-sector lending of these commercial banks is likely to be diverted to PFC and REC,” says an analyst with a domestic brokerage. Besides, the government’s power schemes are likely to add to their credit growth. Upgradation of NPA accounts is expected, which will boost their financials in the medium term. “Interest recognition on many NPA accounts that are expected to be upgraded in the next two-three years will also increase the interest income of these companies,” said the analyst. Stressed and restructured assets of REC accounted for 9.5 per cent of its loan book, while for PFC it was 21.6 per cent of its advances as on December 31, 2017.

The firms have recognised most of their NPAs and stressed assets. Hence, slippages (loans turning bad) are likely to be lower in future. Provisioning may increase in FY19, if these firms switch to IND-AS accounting, restricting their bottom line growth.