PFC, REC shares plummet over 10% in two sessions on draft RBI norms on project finance; is it time to buy the dip?

Multibagger power financing stocks like Power Finance Corporation and Rural Electrification Corporation (REC) continued their downward trend for the second consecutive day on Tuesday, with the former declining by an additional 4% and the latter dropping by 2%.

Today's correction resulted in PFC stock losing 13.60% of its value in 2 sessions, while REC is down 10.20%.

Investors sold off these stocks on Monday following the Reserve Bank's proposal for stricter regulations governing lending to projects under implementation. 

Also Read: PFC, REC, IREDA, PNB, others decline up to 13%: Why PSU stocks are falling sharply today - explained

On May 3, the RBI released a draft prudential framework for lenders involved in project finance. This 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.

According to the draft rules, during the construction phase of a project, lenders are required to set aside a provision of 5% of the loan amount. This provision reduces to 2.5% once the project becomes operational and further decreases to 1% once the project generates sufficient cash flow to meet its obligations.

Analysts believe that these draft norms are intended to mitigate the risks associated with project lending by imposing higher prudential provisions.

The proposed norms have raised concerns among investors, particularly regarding their potential impact on valuation multiples. This apprehension prompted a significant sell-off in the previous trading session.

Also Read: PSU bank shares take a hit due to draft RBI norms on project finance

IIFL Securities estimate that the impact of 5% standard asset provisioning will result in banks making additional provisions of 0.5-3% of net worth and a hit of 7-30 basis points on common equity tier 1 capital. Infrastructure-focused NBFCs like REC, PFC and IREDA can see a potential hit of 200-300bps to their capital ratio, it said.

Is this a good opportunity to enter? 

Osho Krishan, Senior Analyst, Technical & Derivatives, Angel One, said, "REC and PFC are both in a secular uptrend and have soared to their respective lifetime highs in the last trading week. But in the last two sessions, both the counters have attracted an intense bout of profit booking."

Krishan said that the recent action tends to be seen as a healthy formation as both stocks have entered the overbought terrain, and the recent correction would slightly cool down the same. In the short run, some consolidation could be seen near their short-term moving averages. 

Also Read: Elara Securities sets record target prices on multibagger PSU stocks PFC and RECL; here's why

Once the volatility subsides, one may look for an opportunity to re-enter the counters from a medium-term perspective, he added. 

"On the level-specific front, REC has a strong support zone near 480–460, and PFC has a support base near 400–380. Until both counters hover above the same level, there should not be any sign of caution for short-term investors," said Osho Krishan.

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Atul Parakh, CEO of Bigul, said, “Power Finance Corporation and Rural Electrification Corporation have had a solid bullish run-up in FY24 and delivered excellent overall results; their short-term outlook is sideways, but the long-term outlook appears to be positive.”

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.