The ability of Power Finance Corporation Ltd and REC, as state-owned NBFCs, to mobilise and manage substantial amounts of capital renders them indispensable to India's energy ambitions, MOFSL said as it initiated coverage on the two power financiers with 'Buy' ratings. The brokerage believes India is now in a phase of power upcycle, where it sees stressed asset resolutions to continue, leading to further asset quality improvement.
PFC and REC will both be beneficiaries of the revival in power sector capex, MOFSL said. The brokerage suggested a target price of Rs 560 for PFC and Rs 630 for REC. Since both PFC and REC have corrected up to 25 per cent from their recent highs, they now even provide a margin of safety in valuations, the brokerage said.
"For PFC, we expect a loan book CAGR of 15 per cent and a PAT CAGR of 12 per cent over FY24-FY27. This is for an RoA/RoE of 2.9 per cent/19 per cent and a dividend yield of 4.2 per cent in FY27E. PFC (standalone) trades at 1 time FY26E core P/ABV, and the risk rewards are attractive. We initiate coverage on PFC with a Buy rating and a TP of Rs 560," it said.
For REC, it projected a loan book CAGR of 18 per cent and a profit CAGR of 15 per cent over the same period. This is for an RoA and RoE of 2.6 per cent and 21 per cent and a dividend yield of 4.7 per cent in FY27.
MOFSL said India's power sector is undergoing a significant transition from a phase of surplus to one of shortage. India is projected to add 250 GW of new power generation capacity over the next five years, nearly three times the 86GW capacity added in the previous five years.
"An investment opportunity of Rs 42 lakh crore is set to unfold in the Indian power sector over the next decade, with generation accounting for 85 per cent of this capex," it said.
The brokerage said many distressed power plants have been acquired by larger players in the current power upcycle, resulting in the resolution of multiple stressed projects. This trend is expected to continue, leading to further recoveries for lenders like PFC and REC, it said.
As the power sector recovers, there is potential for provision reversals, particularly in the case of loans to thermal power plants that are now generating positive cash flows, the brokearge said.
State-guaranteed loans now constitute 81 per cent and 89 per cent of the loan mix for PFC and REC, it cited.
Besides power projects, PFC and REC are also exploring financing opportunities in electric vehicles and charging infrastructure, bio-refinery projects, ethanol blending, solar panels, Flue Gas Desulfurization (FGD), smart metering, and city-gas distribution (CGD) projects.
MOFSL said PFC and REC's expansion into financing infrastructure & logistics projects is likely to serve as an additional driver of sustained, healthy loan growth.