Shares of Power Finance Corporation Ltd (PFC) and REC Ltd jumped up to 5 per cent in Tuesday's trade as ICICI Securities resumed coverage on the former and initiated coverage on the latter with 'Buy' ratings, citing strong renewables-financing and likely high return on equity (ROE) over the next 2–3 years.
PFC commands 20 per cent market share in renewables as per company estimate. With the backdrop of the Rs 43 lakh crore capex estimated in ensuing years, opportunities are in the offing for PFC, ICICI Secuirties said. It expects loan CAGR of 14 per cent over FY24–27 for PFC with calculated margins improving a tad to 3.5–3.6 per cent against 3.4 per cent for FY24. The declining stress coupled with legacy resolution, minimal slippages over the past two years and provision write-backs are likely to result in improved profitability, it said.
On REC, ICICI Securities said the company is a pioneer in the non-power book lending with over 40 per cent CAGR since FY22 against 15 per cent CAGR on the overall book, which provides confidence on its execution capabilities in new segments.
"REC has fast-tracked growth for its newly entered infra and logistics segment, which builds confidence on its execution capabilities for growth prospects. We expect REC to deliver an AUM CAGR of 17 per cent over FY24–27E with calculated margins hovering in the range of 3.5–3.7 per cent against 3.5 per cent for FY24. Further, strengthening of asset quality and stressed asset resolutions falling in place bodes well for REC," ICICI Securities said.
The domestic brokerage suggested a target price of Rs 550 for PFC, valuing the standalone business at 1.3 times FY26E book value and applying 25 per cent holdco discount for REC stake.
"We believe, PFC’s higher than average multiple is likely to sustain on the back of improved visibility on growth and RoE front," it said.
On REC, it expects provision write-backs would stay and credit cost to be in the negative territory to the extent of 5–10bps for FY25E–26E. Overall, healthy growth outlook, stable margins and provisioning write-backs make REC well positioned to deliver RoE of over 20 per cent over FY24–27E, it said.
"We initiate coverage with BUY and a target price of Rs 600, implying 1.7x (~10% above past 1-year’s average multiple) FY26E BV.
On Tuesday, shares of PFC climbed 5.23 per cent to Rs 409.50. The target price of Rs 550 for PFC suggests 34 per cent potential upside. REC Ltd also gained 4.31 per cent to Rs 465.60. The ICICI Securities target of Rs 600 on the stock suggests 29 per cent potential upside.