PFC, REC shares: Love them or hate them, investors can't ignore two PSU stocks Power Finance Corporation Ltd (PFC) and REC Ltd, which have rallied 200-250 per cent in the past one year. Bernstein, which has initiated coverage on the two PSU multibaggers said there are three kinds of investors in the world: those who love PFC and REC shares, those who wonder why they even exist and those who have never heard of them.
The two PSU power sector lenders were forgotten for a decade but now have a market cap of $15-20 billion, see volumes of $125 million, and yet trade at an 8-10 times trailing P/E. Bernstein believes investors are under-estimating the duration and intensity of the ongoing cycle. It said 100 GW power generation was added in the last six years and an addition of over 300 GW in the next six years is all likely. REC and PFC are Bernstein's most preferred plays in the power cycle.
The foreign brokerage has suggested a target price of Rs 620 for PFC and Rs 653 for REC. Bernstein, which has an 'Outperform' rating on both the stocks, said it likes REC as a company but prefers PFC over REC at prevailing stock levels, given the relative valuations.
"We believe power demand will continue to surprise on the upside and grow at 1 time of real GDP in the medium term in India (against historical 0.8 time). The intensity of capex this cycle could be at least 2 times the last one - given the combination of low utilisation renewables along with thermal/storage to support them," it said.
After jumping 4.28 per cent on Wednesday, shares of REC gained another 2.5 per cent in Thursday's trading session. PFC shares were up 0.8 per cent after rallying 5.67 per cent in the previous session on Bernstein's report. The PFC target suggests 16 per cent potential upside over PFC's Thursday price of Rs 536. At REC's price of 576.20, Bernstein target suggests a 13.3 per cent potential upside.
Incremental lending by PFC and REC are either to government entities (about 70 per cent) or private renewables (30 per cent). Historically, risk has always come from private lending, and renewable loans have a much lower chance of default given the short execution cycle, capex is back-ended, plants are backed by PPA (over 95 per cent), no fuel risk and better receivables.
Bernstein said given the low spread between US and Indian 10-year government securities (270 bps as of June 2024), it is much cheaper to borrow in rupee. Against banks the two specialised NBFCs with sovereign backing have easier access to longer duration liabilities and can also issue 54EC bonds, limiting asset liability mismatch and keeping costs competitive, the foreign brokerage said.
"They are also nominees for key government initiatives, some of which come with state guarantee via RBI. In 2017, the government released a list of 34 distressed thermal plants, a majority with loans from PFC/REC, Now that there is a shortage, the utilization of these assets have increased from 40 per cent in FY18 to 70 per cent in FY24. Nine of these assets have already been resolved and another 6 are in the pipeline for NCLT resolution. The biggest contributor to that list of 34 plants, Adani Power reported profits of Rs 208 billion in FY24," Bernstein noted.