Power Finance Corporation Ltd. estimates that 6.5 percent of its total book is at risk of turning bad as private power sector borrowers may face greater stress than their state-owned peers.
Public sector companies make up 83 percent of the power sector financier’s total loan book of Rs 2.6 lakh crore. The management doesn’t expect any stress there since these are government-owned entities, a Deutsche Bank report said citing comments in a conference call with investors and analysts. But Rs 17,000 crore worth of loans to private companies are at risk of being classified as non-performing loans and could see haircuts after the central bank did away with multiple debt restructuring schemes and implemented a stricter deadline for accounts under resolution, it said.
Along with infrastructure and steel, power sector is one of the largest contributors to Indian banks’ bad loans that have nearly doubled to more than Rs 8 lakh crore since the central bank started its asset quality review in 2015. The stress in the power sector partly stems from inability of state electricity boards and distribution companies to hike tariffs, and under-recoveries linked to power theft and sops announced by governments ahead of elections left them saddled with debt.
Last week, the Ministry of Power placed curbs on government-owned power financiers PFC and Rural Electrification Corporation Ltd. from giving loans to discoms with losses of more than 15 percent unless they draw a road map for reducing them in less than two years. Such loans will be vetted by the ministry before being granted.
PFC has outstanding private sector power loans worth Rs 44,000 crore, or 17 percent of its total loan book. Of these, Rs 14,000 crore are regular operational assets, Rs 8,500 crore have already been recognised as NPAs, Rs 15,500 crore are restructured loans, Deutsche Bank said citing management comments. The remaining Rs 6,000 crore worth of loans are under stress but classified as standard.
The management doesn’t expect significant haircuts from the accounts that may go for insolvency resolution to the National Company Law Tribunal. About 50 percent of stressed private sector plants have already been commissioned, more than half of the stressed assets have power purchase and fuel supply agreements in place and tariffs have risen in the past month, which bode well for these stressed power plants, the report said.
PFC also expects strong demand in bidding for power assets and guided for a loan growth of 10 percent for the next financial year with softer net interest margins.
Shares of PFC were trading 0.2 percent lower in afternoon trades while REC was 0.6 percent down.
PFC fell 25 percent over the last three months amid worries over its stressed assets. Deutsche Bank said it draws comfort that incrementally 6 percent of the book will get impacted. The correction has factored in the likely stress, it said.
- Assuming a haircut of 50 percent, the hit on book value to be about 13 percent.
- Stock trades at 0.5 times its book value for next financial year.
- Retains ‘Buy’; reduced price target to Rs 140 from Rs 160.