REC, PFC, GAIL, BEL, Others: Why PSUs Are Talk Of Town After RBI's Norms On Infra Financing Projects?

Public sector undertaking (PSU) stocks are a hot topic of debate between two major parties in India amidst the ongoing third phase of the Lok Sabha Election. In a riff-off, FM Nirmala Sitharaman has slammed the opposition's claims of PSUs in disarray and said they have thrived under the current government. In a classic quote, she added, "'Ulta Chor Kotwal Ko Daante". Why are PSUs currently discussed and what is the outlook ahead?

Through her X handle formerly known as Twitter, Sitharaman said, "Repeated claims from the Indian National Congress ecosystem and Rahul Gandhi in particular that Public Sector Undertakings (PSUs) are being dismantled & are in disarray under the current government are a textbook example of 'Ulta Chor Kotwal Ko Daante,' as the facts reveal a very different picture."

Under PM Narendra Modi's leadership, she said, "PSUs are thriving, benefiting significantly from the culture of professionalism infused in them along with increased operational freedom."

Her remarks come after Congress had claimed that PSUs were in disarray and neglected.

PSU Stocks Volatile:

The start of this month has been bearish for PSU stocks including PSU Banks. In fact, from May 2nd to 7th, Nifty PSU Bank accounted for 14% of the market value erosion on the NSE.

In the first four trading sessions of May, NSE-listed companies recorded an erosion of Rs 7.9 lakh crore, taking its market value to Rs 395.13 lakh crore. Of this total, the Nifty PSUs alone faced a decline of Rs 1.1 lakh crore in their market value to Rs 16.5 lakh crore as of May 7.

From May 2-7, Nifty PSU Bank dropped by nearly 6.78%. Not just that PSU and CPSE stocks on a broader scale entered into a frenzied selling from May 6-7, which led to a decline of 5.21% in the Nifty PSE index and 4.10% in the Nifty CPSE.

On May 8th, all three indexes have risen by 1-2.5%. However, the latest recovery is still not enough to bring the month-on-date performance of PSUs into the green.

Month-on-date, Nifty PSU Bank is still down by 6%, while Nifty PSE has slipped by 3%, and Nifty CPSE shed over 2.3%.

Why PSU Stocks Are In the Limelight?

The spark of volatility in PSU stocks which have been witnessing extraordinary bullish trends since 2023, emerged after RBI released the draft Direction on the prudential framework applicable to financing of project loans.

RBI in its statement on May 3 said, "Given the complexities involved in project finance, the revised guidelines seek to provide an enabling framework for the regulated entities for financing of project loans, while addressing the underlying risks. The Comments on the draft Direction are invited from the public/stakeholders by June 15, 2024."

The latest upside in PSU stocks is after reports claimed that PSU lenders are likely to challenge RBI's new norms on infra financing.

RBI's New Rules On Infra-Project Financing:

Some of the key highlights of the framework are:

- Lenders desirous to have project finance exposures shall have a Board-approved policy for the resolution of stress in the projects on the occurrence of a credit event.

- For any project, all mandatory prerequisites should be in place before financial closure. An indicative list of such prerequisites includes the availability of encumbrance-free land and/or right of way, environmental clearance, legal clearance, regulatory clearances, etc., as applicable for the project.

- However, for infrastructure projects under the PPP model, land availability to the extent of 50% or more can be considered sufficient by lenders to achieve financial closure.

- In projects financed under consortium arrangements, where the aggregate exposure of the participant lenders to the project is up to Rs 1,500 crores, no individual lender shall have an exposure which is less than 10% of the aggregate exposure. For projects where the aggregate exposure of lenders is more than Rs 1,500 crores, this individual exposure floor shall be 5% or Rs 150 crores, whichever is higher.

- The financing agreement shall generally not allow any provision for a moratorium on repayments beyond the DCCO period and the repayment structure shall be realistically designed to factor in the lower initial cash flows.

- The original or revised repayment tenor, including the moratorium period, if any, shall not exceed 85% of the economic life of the project.

- Also, positive net present value (NPV) is a prerequisite for any Project financed by lenders. Any subsequent diminution in NPV during the construction phase, either due to changes in projected cash flows, project life-period or any other relevant factor which may lead to credit impairment, shall be construed as a credit event. Accordingly, lenders shall get the project NPV independently re-evaluated every year.

Will RBI's New Rule Impact PSU Stocks?

Shreyansh V. Shah, Research Analyst, StoxBox told GoodReturns.In that PSUs including banks and financial institutions are under pressure after the RBI tightened guidelines for lending to projects under the construction phase. Market participants are sceptical about the profitability and credit costs for these companies following the implementation of these new norms.

Also, Shah added, "The new guidelines may hamper the appetite of institutions for funding the under-construction projects which may drag the brisk pace of infrastructure development in the country. He said, "We hope that the central bank takes all stakeholders into confidence before implementing the new guidelines which have the potential to have wider ramifications for the overall economy."

Notably, the analyst also believes that such scenarios also bring in the opportunity for a value-creating portfolio.

He said, "Meanwhile, we continue to remain constructive on the overall PSU theme and believe that these events provide an ideal opportunity for building a portfolio from a medium to long-term perspective."

Nonetheless, in a year, all three indices have outperformed the benchmark Nifty. The Nifty PSE index is a multi-bagger with a surge of 103%, while Nifty CPSE and PSU Bank index jumped by 95% and 72% respectively.