Buy PFC, REC: Motilal Oswal

“Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) have corrected ~45% from the peak amidst concerns relating to the deteriorating financial health of SEBs. In this backdrop, media reports of possible restructuring of the Madhya Pradesh SEB loans from the state government and developments in the recent conference on "Distribution Sector Reforms" are enthusing. At the conference, the state governments unanimously resolved to bring down commercial losses and ensure financial sustainability of DISCOMs. (We have presented the details on page 2). This is positive for power financiers like PFC, which has 65% exposure to SEBs, and REC, which has 83% exposure to SEBs.”

“In an Update, "Just an Eclipse…Brighter Days Ahead" (dated June 2011), our Utilities team had opined that FY11 would be the peak of SEB losses. With decline in ST power cost and improvement in availability of LT power, there would be a reduction in SEBs' power purchase cost. This combined with gradual tariff increase would lead to an improvement in SEB finances. Post their meetings with Tamil Nadu State Electricity Regulatory Commission (TNERC) and Tamil Nadu Generation and Distribution Company (TANGEDCO), they have come away reassured about impending improvement in TANGEDCO's financials. They have noted that there is a concrete roadmap to achieve financial viability for TANGEDCO and a clear consensus amidst authorities on restoring the financial health of the power sector.”

“PFC (see our Detailed Report dated 9 May 2011) and REC (see our Detailed Report dated 25 May 2011) are our preferred bets to play the theme of 'improvement in SEB finances'. These companies either have an escrow mechanism or state government guarantees for a large part of their funding to SEBs. Valuations are attractive. We reiterate Buy on PFC/REC with a target price INR290/INR310,” says Motilal Oswal research report.

Institutional holding more than 40% in Indian cos

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