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The Rural Electrification Corporation prefers a merger with Power Finance Corporation, a fellow non-banking financial company, rather than just an equity transaction.
REC is of the view that unlike in the case of the ONGC-HPCL deal, which involved an equity transaction, there needs to be a merger to ensure value to both the companies, a senior company executive said.
“The combined REC-PFC entity will immediately have a bottomline of around ₹10,000 crore. It will grow to have a market capitalisation of around ₹1 lakh crore in the next 3-4 years. This 2x growth will be achieved through greater synergy and a stronger balance sheet,” an REC official told BusinessLine .
According to those associated with the developments, the merger — if it happens — will result in an integrated power sector lending institution with a pan-India presence and will provide an opportunity for the Centre to make money and meet its disinvestment target.
According to data from the BSE, REC has a market capitalisation of around ₹24,000 crore while PFC’s market capitalisation is around ₹26,000 crore. REC’s net profit for the financial year 2017-18 stood at ₹4,647 crore, while the PFC reported a bottomline of ₹5,855.22 crore.
“Both REC and PFC are lenders to the power sector and are public sector undertakings. This will allow us to have a combined entity that has the same nature as that of the individual entities with a much larger reach. The stronger balance sheet of the merged entities can be leveraged for borrowing at lower rates,” the official said.
Succour to banks
For the Centre, REC buying out the promoter’s stake in the PFC represents a better deal as the Centre can rake in around ₹3,400 crore more. At present valuation levels, the Centre’s 65.64 per cent stake in PFC can fetch the exchequer around ₹17,243 crore. The Centre’s 57.99 per cent stake in REC can fetch the exchequer around ₹13,840 crore, if divested completely.
In addition to the fiscal gains, this combined entity will help ease the plight of banks stressed by delayed payments to generators from power distribution companies (discoms).
A report of the High Level Empowered Committee constituted to address the issues of stressed thermal power projects also made this point. “Public Financial Institutions (PFI), such as REC and PFC, may discount the receivables from discoms and make upfront payment to the generators,” it said.
Effectively, this will result in the financial institutions realising their dues from the discoms in due course and charging interest for the period of delay in payment by the discoms.
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