Foreign brokerage Bernstein has reaffirmed its 'Outperform' rating for two major public sector undertakings (PSUs), Power Finance Corporation (PFC) and REC Ltd, despite acknowledging challenges such as slower growth and heightened competition. The firm projects a significant upside for both Maharatna PSU stocks.
PFC and REC: Target Prices and Valuation
According to Bernstein, PFC is currently trading at 0.9 times its trailing book value. The brokerage has set a target price of Rs 465 for PFC, indicating a potential upside of 37% from current levels. For REC, which Bernstein notes is valued close to the merger ratio proposed by PFC, the target price is Rs 410, suggesting a substantial upside of 41.2%.
While maintaining a positive outlook, Bernstein also highlighted that for REC to reach one time book value, a shift in its growth narrative through new segments would be necessary.
Growth Concerns Amidst Competition
Bernstein admitted it had previously misjudged the loan book growth for both companies following the upcycle in FY23-24. Despite strong asset quality, both PFC and REC reported weak numbers, with PFC experiencing a 2% sequential loan book degrowth and REC reporting only 1% growth in the June quarter. The biggest drag on loan book growth stemmed from the DISCOM and renewable segments.
The brokerage identified three primary reasons for the recent slowdown in growth:
- Bank Re-entry: Commercial banks, which had previously shied away from the power sector, have become increasingly active. Bernstein noted instances where banks refinanced existing PFC-REC loans, intensifying competition.
- Renewable Sector Shifts: Utility-scale renewable additions are slowing due to transmission constraints and are expected to decline this year. Growth is now concentrated in rooftop projects and the KUSUM scheme, areas where PFC and REC have limited presence.
- Improved DISCOM Health: State-owned DISCOMs, traditionally a less competitive segment for PFC and REC, have seen improved financial health due to central government initiatives. With average cost of supply and average revenue realized turning favorable in FY25, DISCOMs require less support for loss funding, impacting loan demand.
Asset Quality Remains a Positive
On a positive note, Bernstein underscored that asset quality remains a strong point for both PFC and REC. The brokerage expressed limited concerns regarding asset quality in the near to medium term. However, it cautioned that the phase of significant credit reversals is largely over, and credit costs are expected to gradually increase.
Overall, Bernstein retains its positive view on PFC and REC, emphasizing that loan book growth will be the critical factor to monitor over the coming quarters.