- Power Finance Corporation and Rural Electrification Corporation (REC) stocks continue to decline for the second consecutive day, with the former dropping by an additional 4% and the latter by 2%.
- The sell-off of these stocks follows the Reserve Bank’s proposal for stricter regulations on lending to projects under implementation.
- Analysts believe that these draft norms are intended to mitigate the risks associated with project lending by imposing higher prudential provisions.
Power financing stocks like PFC and REC continue to drop following the Reserve Bank’s proposal for stricter lending regulations, causing investors to question the potential impact on valuation multiples.
Impact of RBI’s Proposed Regulations
On May 3, the RBI released a draft prudential framework for lenders involved in project finance. The framework suggests increasing standard asset provisioning to 1-5% of loans from the current 0.4%, gradually, for project loans that are not yet overdue but are stressed. This has raised concerns among investors, particularly regarding their potential impact on valuation multiples. Infrastructure-focused NBFCs like REC, PFC and IREDA can see a potential hit of 200-300bps to their capital ratio, according to IIFL Securities.
Opportunity for Entry?
Osho Krishan, Senior Analyst, Technical & Derivatives, Angel One, suggests that the recent correction could be seen as a healthy formation as both stocks have entered the overbought terrain. He advises that once the volatility subsides, one may look for an opportunity to re-enter the counters from a medium-term perspective. Atul Parakh, CEO of Bigul, agrees, stating that despite the short-term sideways outlook, the long-term outlook for both PFC and REC appears to be positive.
Conclusion
While the proposed regulations by the RBI have caused a temporary decline in power financing stocks like PFC and REC, experts suggest that this could present an opportunity for re-entry once the volatility subsides. The long-term outlook for these stocks remains positive, despite the short-term uncertainties.
