REC and PFC stocks bounce back after clarification in investor call

Right from the start of the week, well-known power financing stocks like REC Ltd and Power Finance Corporation (PFC) plummeted between 7-8%. They were mostly spooked by the Reserve Bank of India’s draft guidelines on project financing. It stated that a 5% general provision should be made on all existing and fresh project loans in the construction phase, i.e. before the date of commencement of commercial operation (DCCO).

These guidelines are intended for both banks and other lending institutions. REC and PFC are the main agencies in charge of funding power sector projects. Both these stocks, which till last week were seen moving northwards witnessed a landslide fall and registered back-to-back losses. However, on Wednesday, the pair made a comeback.

On Wednesday, the share price of REC climbed nearly 6% after opening at ₹509. The stock of PFC too rallied nearly 5% and formed an open=low candle, where the low of the day is equal to the opening price of the day. So, what was the reason for these stocks reversing their falling trend?

The reason behind this reversal is that clarity emerged concerning the new RBI draft guideline. REC said that the new RBI draft guidelines will not impact the company’s profitability, book value or net worth. The impact of said guidelines will be on Tier 1 capital only. However, 80% of current projects are already commissioned as informed in investor calls. Furthermore, the company said that guidelines are unlikely to have an impact on borrowing costs for borrowers in renewable projects and non-renewable projects. They are unlikely to be subjected to higher rates as they have plenty of supply borrowers.

REC has made sanctions of nearly 38% of total sanctions during FY24 for Renewables Projects including Large Hydro projects. Further, the company said that metro projects backed by the State Government won't be affected by the proposed new rules. The company also mentioned that they don't need an impairment reserve because they've set aside more than enough according to the IRAC guidelines.

REC has diversified its loan portfolio with a mandate of up to 33% loans in the Infrastructure and Logistics sector. In FY24, the company made the highest ever yearly sanctions of ₹3,58,815 crore and disbursement during the FY24 stood at ₹1,61,462 crore which was also the highest ever yearly disbursement. The net credit-impaired assets as of March 2024 stood at 0.86% as against 1.01% at the end of March 2023. This comes with a provision coverage ratio of 68.45% on non-performing assets as of March 2024.

The share price of REC has jumped about 300% in the last 12 months, while the performance of PFC stock has kept pace and gained over 200% in the same period.