My investment thesis in both REC, PFC
- Half of private loan book is already in NPA and 70% is already provided. Recent recoveries/ restructuring are above 30%. Comparative to last 5 years, private power sector is in good shape. Not expecting any huge surprise NPAs
- I am not expecting loan book to growth rate beyond 10%. Even if loan book stagnant, it’s ok. Because that increases the disposable profit which inturn increases dividend amount.
- My biggest fear on this is spread compression due to interest rate cycle and state govt financial position. If I check history, they are able to maintain spread in both interest rate upcycle and downcycle. But many state government finances are in bad shape, if central govt intervenes and ask these twin to lend further loan at same interest rate. If spread drops by 100 bps, atleast 30% of PAT will be gone and while perception of cheap will go for toss
Disc: position in REC and PFC
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