PFC-REC merger may bring limited cost savings; some revenue benefits possible: Morgan Stanley

New Delhi [India], August 20 (ANI): The proposed merger of Power Finance Corporation (PFC) and REC may offer some revenue benefits through greater scale and reduced competition, but cost savings from the deal could remain limited, according to a Morgan Stanley report.

The companies have announced a merger under which REC shareholders will receive 88 shares of PFC for every 100 shares of REC. PFC expects to complete the merger with REC by April 1, 2027, subject to the required regulatory approvals.

Morgan Stanley said it sees limited scope for cost savings from the merger because both companies already have low operating costs. At the same time, the brokerage said the combined entity could see some revenue benefits due to its larger scale and the removal of competition between the two companies.

"We see limited cost synergies (given low operating costs); there could be some revenue synergies owing to scale and elimination of competition between the two, though not very obvious," Morgan Stanley said.

The report said it is awaiting further details on the merger, including the timeline and statutory approvals.

The merger comes at a time when PFC and REC are facing slower loan growth. Morgan Stanley said the gap between the loan growth of PFC and REC and credit growth by banks to the power sector has widened significantly.

The report expects loan growth at both companies to recover gradually to high single digits over the next few years. It has also assumed that net interest margins will remain largely stable, with some support from lower leverage.

For PFC, Morgan Stanley has cut its estimates for core earnings per share by 5.5 per cent for F28 and 7 per cent for F29. It has also reduced its estimate for PFC's loan compound annual growth rate for F26-29 to around 6 per cent from around 9 per cent earlier.

The report said the company's asset quality remains supportive. It expects PFC to continue generating mid-teens core return on equity in F27-29, with stable margins and manageable credit costs.

However, Morgan Stanley said loan growth remains a concern as bank credit to the power sector and overall system credit have accelerated.

For REC, the brokerage has also lowered its earnings estimates and long-term loan growth and profitability assumptions. It expects REC's loan growth to remain moderated.

Overall, Morgan Stanley said the proposed merger could create some benefits from scale and reduced competition, but the immediate cost-saving opportunity appears limited. (ANI)

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