UBS said 20 per cent of PFC and REC's total loan book is now in renewables and infrastructure, which could reach around 40 per cent by FY29, as India doubles renewables capacity over the next five years. 
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UBS said 20 per cent of PFC and REC's total loan book is now in renewables and infrastructure, which could reach around 40 per cent by FY29, as India doubles renewables capacity over the next five years. Foreign brokerage UBS has initiated coverage on PSU multibagger stocks Power Finance Corporation Ltd (PFC) and REC Ltd, saying the power sector financiers remain in earnings upgrade cycles and one could expect their return on equities (ROEs) to remain robust at 18-20 per cent. The broking firm has a relative preference for PFC to REC.
UBS does not see the two state-run firms as financiers of traditional power capex but high growth renewable power generation and infrastructure capex. It said 20 per cent of PFC and REC's total loan book is now in renewables and infrastructure, which could reach around 40 per cent by FY29, as India doubles renewables capacity over the next five years.
"Changing loan mix is also altering credit quality dynamics as renewables loans are shorter tenure, smaller and carry lower risk than thermal plants, while resolution of legacy assets remains a tailwind near term. Access to long-term funds at reasonable rates due to implicit government guarantees remains a key advantage," it said.
The government's distribution schemes provide visibility for early to mid-teens loan growth in the sector, it said while suggesting a target price of Rs 670 for PFC and Rs 720 for REC.
UBS said the incremental loan growth for both REC and PFC will come from India's energy transition-related capex and participation in state-backed infrastructure projects. It estimated total capex of Rs 4 lakh crore annually in the power sector — Rs 1 lakh crore from renewables generation alone and Rs 1.5 lakh crore each from transmission and distribution (T&D).
"In the near term, ongoing distribution schemes such as the Revamped Distribution Sector Scheme should ensure early to mid-teens loan growth for both. We also expect PFC and REC to continue to have access to funds at competitive rates despite large net issuance of 0.4 per cent of GDP as they have also diversified to tap global savings (foreign borrowings now 18-28 per cent). We expect them to benefit from softening yields of G-Secs and build a 20-30bp cost of fund decline" UBS said.
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