The Allahabad high court’s decision to deny relief to power companies facing debt servicing problems may have stoked fears of a fresh bout of write-offs for the banking sector. But the decision has triggered a rally in the shares of Power Finance Corp. Ltd (PFC), Rural Electrification Corp. Ltd (REC) and PTC India Financial Services Ltd. The stocks gained 6-8% over the last four days.
PTC India Financial Services, the smallest of the lot, continued the gains on Thursday, rising 6%. The company’s results for the June quarter showed sequential improvement in provisions and earnings. Compared to a loss in the March quarter, it reported a profit of about ₹ 55.9 crore.
PFC and REC are yet to release their financial results for the June quarter. But low valuations—all three are trading at a huge discount to their book value—and hope that the worst may be coming to an end are bringing these stocks back in the spotlight.
To recap, all three stocks have been laggards, losing 29-50% over the last one year as the companies reported weak earnings and rise in non-performing assets (NPAs).
But with the resolution of stressed assets gathering pace, the expectation is the companies will soon come out of the bad loans mess. “A significant portion of the stressed assets, primarily in the legacy part of the portfolio, are in final stages of resolution—expected to be resolved in FY 2019 by various modes including change in promoters, sale to asset reconstruction companies or one-time settlement," Ashok Haldia, managing director and chief executive officer of PTC India Financial Services, said in a statement.
PFC and REC have recognized a large portion of their non-performing loans after the Reserve Bank of India’s circular in February this year. Encouragingly, the companies even saw some loan upgrades (from NPA and restructured to standard category).
“REC expects further upgrades in FY19, a key monitorable," Edelweiss Securities Ltd said in a note in May this year.
Still, the companies are not completely out of the woods. The recent sale of Prayagraj Power Generation Co. Ltd happened at a 45% haircut to lenders, reports indicate. Comparatively PFC’s provision for stressed assets stood at 31% as of last fiscal year. If stressed assets have to be resolved at a higher write-off, then companies will have to take a bigger hit.
Another factor investors need to be mindful of is slowing revenues and reducing yields on loan assets at these companies.
Strengthening interest rates and a significant slowdown in conventional generation capacities (limiting growth opportunities) are clouding the earnings outlook. Indeed, bad loans are a big challenge and amicable resolution does provide a tactical opportunity for investors. But for durable gains, the growth and earnings outlook will also have to improve.