PFC, REC gain up to 3% as UBS initiates 'buy' rating on high growth outlook

UBS believe REC and PFC's growth drivers and trajectory will be similar, with REC growing slightly ahead of PFC.

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Shares of state-owned power financiers, Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) gained up to 3 per cent on the BSE in Thursday’s intra-day trade after brokerage firm UBS initiated coverage of these stocks with 'Buy' ratings, with upside potential of up to 21 per cent.

The brokerage firm views PFC and REC as financiers of high growth renewable power generation and infrastructure capex (3x of power capex) in India and not as traditional power capex financiers. UBS set price targets of Rs 670 and Rs 720 for PFC and REC, respectively, implying a price to book value of 1.6/2x FY26E.

Shares of REC are up 3 per cent to Rs 636.15, while PFC was up 2.5 per cent to Rs 552.35 on the BSE.

At 11:01 AM; these stocks were trading higher by 1 per cent, as compared to the 0.23 per cent rise in the BSE Sensex. REC (Rs 653.90) and PFC (Rs 580.35) had hit a 52-week high on July 12, 2024.

According to analysts at UBS, nearly 20 per cent of PFC and REC's total loan book is now in renewables and infrastructure, which the brokerage firm estimates, could reach around 40 per cent by FY29 as India doubles its renewables capacity over the next five years. 

Growth would be supplemented by government distribution schemes, which provides visibility for early to mid-teens loan growth in the sector. That apart, a changing loan mix is also altering the company's credit quality dynamics as renewable energy loans are shorter in tenure, smaller and carry lower risk than thermal plants.

However, the resolution of legacy assets remains a tailwind in the near term. Access to long-term funds at reasonable rates due to implicit government guarantees remains a key advantage, the brokerage firm noted.

“We believe REC and PFC's growth drivers and trajectory will be similar, with REC growing slightly ahead of PFC. REC is trading at a nearly 35 per cent premium to the PFC standalone multiple versus 25 per cent historically. Hence, we have a relative preference for PFC to REC,” UBS stated in its research note.

Both PFC and REC have seen large re-ratings in the past year as consistent EPS upgrades and the improving loan growth picture have altered investors' perceptions.

The brokerage firm believes that there could be more re-ratings in the future, as the market still does not see the loan growth dynamics as a long-term sustainable story and expects some kind of growth/asset quality shock to re-emerge in the coming years.

UBS believes that there is a clear growth path for the company in the medium term, which would gradually drive a re-rating of the sector.