Shares of power sector lender Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) plunged as much as 12.83 per cent and 11.05 per cent on Friday after the government approved a turnaround plan for state electricity boards that is likely to impact the lenders’ margins.
According to traders, the package is a long term positive but would compress lenders’ margins significantly in short term. The compression in margins can affect profits by 10 per cent in the medium term.
At 11.06 am, REC and PFC shares were trading 8.51 per cent and 7.06 per cent down at Rs 243.50 and 234.20. Sensex was up 8.13 points at 26,312. Later, the scrip of REC closed 10.35 per cent down at Rs 238.60 and PFC ended 7.84 per cent down at Rs 232.25.
As per the plan cleared by the Cabinet on Thursday, states will have to take over 75 per cent of the SEBs’ loans as of September 30, 2015, by FY17-end, and 50 per cent by the end of March 2016 itself. The states will have the facility of a concessional interest rate of about 9 per cent in servicing the loans, compared with the present 13-14 per cent interest rate on SEBs’ outstanding debt. The states will issue bonds at 0.5 per cent above the G-Secs.
Nomura in a research note said, “As of March 2015, the power distribution companies accumulated losses of Rs 3.8 trillion (2.8 per cent of GDP) with their outstanding debt nearly doubling over the last three years to Rs 4.3 trillion. The plan unveiled by the government is expected to wipe out Discom losses by March 2019.”
“These measures clearly point to medium-term health of state electricity boards (SEB)…However, we are disappointed that incremental losses will become a part of fiscal targets materially only from FY20. This leaves scope for back-ending of reforms by States,” said Jefferies.
(With inputs from Reuters)