Investors' concerns over PFC's acquisition of REC may finally end

With Power Finance Corporation (PFC) acquiring the government’s entire stake of 52.85 per cent in REC, many investors were worried. 

The concerns were over the capital position of PFC, which would weigh on its loan book growth and profitability. 

But, it seems, the Street is now getting convinced about the deal. “After clarification on the deal, we believe PFC would be able to meet the regulatory requirements on capital ratio,” said Deepak Kumar, analyst at Narnolia Financial Advisors. The company management, too, is confident of sustaining the momentum. 

In the December 2018 quarter (Q3), PFC posted a 34 per cent year-on-year (YoY) rise in disbursement and its loan book rose by about 14 per cent. This also propelled its top line, with net interest income growing 27.8 per cent YoY to Rs 2,435 crore.

Another aspect that worried investors was a likely rise in funding cost as the acquisition would partly be funded through debt. However, “We will make sure that the debt funding does not lead to a significant rise in the cost of funds,” said NB Gupta, director-finance at PFC. 

Even in Q3, with use of low-cost financing such as 54 EC bonds, PFC was able to lower its cost of funds from 8.3 per cent in December 2017 to 8 per cent in Q3. This, in turn, helped keep net interest margin at 3.4 per cent levels in Q3, albeit marginally lower than the year-ago quarter. “Though there would be some impact on the cost of funds, expected dividend income from REC would offset the same at the bottom line,” Kumar adds. 

Though the equity-debt mix is not known, rough calculations suggest that PFC’s investment to acquire REC would yield about 6.7 per cent. This is assuming total cost of Rs 15,000 crore for 104.37 crore shares and annual dividend receipt per share of Rs 9.5.

Meanwhile, faster resolution of stressed cases where PFC and REC have jointly lent, should also help. In Q3, PFC saw Rs 319 crore reversal in provisions due to upgradation of non-performing assets (NPAs), pushing up its net profit by 71 per cent YoY to Rs 2,076 crore.