Government reform plans send shock waves through power finance companies

MUMBAI: Shares of power sector lenders dived on Friday on worries the new restructuring package for the ailing power distribution companies (discoms) would impact their earnings.

Rural Electrification Corporation (REC) plunged 10.35% and Power Finance Corporation (PFC) dropped 7.8% on Friday. Shares of public sector banks, which are big lenders to discoms, however, rose on Friday in a listless market partly because of better-than-expected second quarter results from State Bank of India (SBI).

The government on Thursday evening announced Ujwal Discom Assurance Yojana (UDAY) to help state electricity boards (SEBs) wipe off their losses by 2018-19.But, the restructuring terms could squeeze the net interest margins (NIMs).

“The reforms announced by the government are significant struc tural positive for SEBs but PFC and REC loans to SEBs would get re-priced at lower levels which could have a short-term impact on these two companies," said Vinay Khattar, head of research, Edelweiss Financial Services.“Though at this point, the reforms are negative for REC and PFC, but over time it will definitely benefit the power sector as a whole."

Kotak Institutional Equities said the package will squeeze interest spread -the rate charged by banks on loans to private sector customers minus the interest rate lenders paid for raising money -for PFC and REC to 2.2-2.3% from 3.7-3.8%.

“We expect PFCREC's earnings to be lower by 15-20% leading to medium-term RoE (return on equity) of 13-14% as compared to 2023% reported in FY2015,“ said Ko ak in a note. The brokerage has retained its `add' ratings for both he companies with a price target Rs 300 for PFC and of Rs 350 for REC.On Friday, PFC closed at Rs 232.25 and REC closed at Rs 239. Analysts said the reforms will, however, be beneficial for PFC and REC after wo or three years.

The CNX PSU Bank index was up 3.34% on Friday, its biggest single day gain in the last two months. SBI gained 4% after the state-owned lender's standalone profits jumped 25% while Bank of Baroda rose 5%. Oriental Bank, Andhra Bank, Dena Bank, Punjab National Bank, Central Bank and Canara Bank gained between 2% and 3%.

Analysts, however, feel gains in hese stocks could be short ived. Crisil said the conversion of discom loans into bonds, as part of the discom restructur ng, would lead to capital sav ngs of roughly Rs 12,000 crore for hese banks but will shave 8% of heir profits in 2016-17.