REC’s acquisition will stretch PFC’s balance sheet, says Ind-Ra
New Delhi: The acquisition of REC Ltd will stretch the balance sheet of Power Finance Corp (PFC) with an impact on its return on assets (2QFY19: 1.86%) and return on equity but the positive cash flow of the latter over October 2018 to March 2019 will address the liquidity concerns, said India Ratings& Research (Ind-Ra).
The ratings of REC will be aligned with the rating of PFC. However, until the formalities of the acquisition are complete, Ind-Ra will continue to rate REC on the basis of the support it derives from the government as a public policy institution.
At the end of first half of this financial year, the cash and cash equivalents in the balance sheet of PFC was Rs 17.99 billion and REC was Rs 0.22 billion.
While the contours of the acquisition deal are being finalised by a group of ministers and secretaries, the leverage of PFC is likely to go up by Rs 140 billion-Rs 150 billion to buy out the government’s stake in REC. The acquired entity may breach the group/single borrowing limit with banks and may require diversification with regard to lenders/investors, an official statement issued by Ind-Ra said.
The acquisition is aimed at achieving the integration of the power financing businesses of REC and PFC, while the disinvestment proceeds will boost the government’s finances and help reduce the fiscal slippage in FY19.
Over FY14-FY18, the loan books of PFC expanded at a CAGR of 10.22% to Rs 2.79 trillion and REC at and 12.66% to Rs 2.39 trillion. At 1HFYE19, the loan books of both entities were dominated by power generation companies, though REC has a wider presence in the distribution segment than PFC, it said.
REC’s gross NPAs 175bp lower than those of PFC at 1HFYE19. For REC and PFC, delinquent assets are arising only from their private sector exposure. A lower exposure to private sector lending has helped REC in maintaining better asset quality. Private sector lending accounted for 13% and 18% of the loan books of REC and PFC at 1HFYE19, respectively.
On 6 December 2018, the Cabinet Committee on Economic Affairs gave in-principle approval for the strategic sale of the government of India’s 52.63% stake in the total paid-up equity capital of REC Limited to PFC. REC is likely to continue to be a separate entity.
Source: economictimes.indiatimes
