The share price of Power Finance Corporation (PFC) and REC are under pressure in today’s trading session. Intraday, the PFC share price slipped to Rs 410, down about 2%, while REC dropped sharply to around Rs 360, falling nearly 3.5%. The decline in the share price came after investors reacted to the in-principle approval for combining the two state-owned power financiers.
Let’s take a look at the key factors every investor need to know about these stocks –
A Budget push sets the merger ball rolling
The immediate trigger for the stock reaction was the Budget announcement that proposed restructuring large public sector non-banking financial companies in the power sector.
Acting on this, the PFC board accorded in-principle approval for a merger with REC. In its regulatory filing, the company said the board took note of the Budget proposal and approved restructuring, while ensuring that “post-merger, PFC continues to remain as a ‘Government Company’ under the Companies Act, 2013, and other applicable laws.”
Finance Minister Nirmala Sitharaman reinforced the intent during her Budget speech, stating, “In order to achieve scale and improve efficiency in the public sector NBFCs, as a first step, it is proposed to restructure the Power Finance Corporation and Rural Electrification Corporation.”
PFC stake in REC – Why this matters
PFC already owns 52.63% of REC, after acquiring the government’s stake in March 2019, following approval from the Cabinet Committee on Economic Affairs. Since then, REC has been operating as a subsidiary of PFC.
As per the PFC regulatory filing, it noted that, “On December 06, 2018, the Cabinet Committee on Economic Affairs (CCEA), gave its ‘In Principle’ approval for PFC to acquire 52.63% Govt’s holding in REC along with transfer of management control. Accordingly, PFC acquired REC in March, 2019 and PFC became the promoter of REC and REC became the subsidiary of PFC.”
Similarly, REC in the exchange filing noted, “the Board of REC has accorded its in-principle approval to proceed with restructuring in the form of a merger of REC and PFC and to formulate a detailed merger proposal in accordance with applicable laws and regulations, ensuring that the merged entity continues to remain as a “Government Company” under the Companies Act, 2013 and other applicable laws.”
PFC and REC Q3 performance recap
PFC’s standalone net profit rose about 15% year-on-year to Rs 4,763.33 crore, while total revenue grew over 12%. Interest income remained strong, and the loan book expanded to around Rs 11.51 lakh crore by December-end. PFC also announced a Rs 4 per share interim dividend, taking total interim payouts for the year higher.
REC, on its part, reported a net profit of Rs 4,043 crore, marginally higher than last year. The net interest income grew nearly 3%. The company also declared an interim dividend of Rs 4.60 per share, with a record date already announced.
What investors should track from here
Going ahead, the key factor will be on the merger structure. The government’s objective is to achieve scale, improve efficiency and enhance credit flow to the power sector.
Until detailed announcements are made, PFC and REC shares are likely to stay in focus, reacting to every update from the government or the companies.