Discom revamp plan: Restructuring out of the mess : AnandRathi Institutional Research

India Financials - Discom revamp plan: Restructuring out of the mess by Mr. Nikhil Rungta(Lead Analyst- Banking & Financials, AnandRathi Institutional Research)

The government has announced measures to raise troubled power distribution companies (Discoms) out of their current operational and financial mess. This should moderate potential losses for the banking sector, and lift a fairly significant market over-hang. More details are awaited. We expect there will be bank losses - but it is the way ahead.

PSU banks and economy problem. The SEB financing situation is a PSU banks and REC/PFC problem - private banks have been out of it. This should give some relief to the banking sector, a bigger break to the power sector and the broader economy in general.

The suggested solution. There is an estimated Rs. 4.3trn (~5.5%% of bank loans) banking sector exposure: 75% of these loans will now be taken over by the state governments (will have NPV hit), while the remaining 25% of loans will be refinanced at the "base rate + 0.1%". States will issue non-SLR including SDL (State Development Loans) bonds in the market or directly to the respective banks/financial institutions (FIs) holding the Discom debt. There are incentives for the SEBs to stick to the se terms (Central government grants) and there are stringent conditionalities that go with the plan. While the devil is in the detail, and potentially in the politics, it does appear workable. The remaining 25% would be kept by Discom either in the form of loans or in the form of bonds at lower of market rate or "base rate + 0.1%".

NPV losses would be lower than expected. While the interest rate on the bonds/loans would come down to the "base rate + 0.1%" (~9.5%-10%) from the current 12-13%, we believe there would be NPV losses / margin impact for the banks. Margin impact (assuming 2.5% impact on yields) ranges from 2bps for SBI to 24bps for Central Bank of India. However, we get comfort from the fact that there would be a release of provisions from the restructured Discoms coupled with lower capital requirement for the bank (risk weight of state government bonds is lower than risk weight of Discom exposure). We will see biggest improvement in the asset quality of the banks. Around 20% of the restructured advances of the banking system constitute Discoms while for Vijaya Bank, Central Bank of India and Syndicate Bank it constitute more than 40% of their restructured advances.

It should be a palliative for.. We expect REC/PFC to be relatively large beneficiaries (most at risk if restructuring terms are adverse), Vijaya, IOB, Union Bank, OBC, Canara, and Andhra amongst the larger gainers, with only a little for BOB and SBI. At aggregate, this should be a benefit for Banks and the economy - but it is a government (and potentially) bank-driven bail out - not an economic revival.

Source : Equity Bulls

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