PFC, REC Get 'Buy' From ICICI Securities As It Sees Them Leading Energy Transition Funding

Power financiers including Power Finance Corp. and REC Ltd. have received a 'buy' rating from ICICI Securities Ltd. as the brokerage sees both companies at a vantage to ride this energy transition tide and reaping the benefits of the changing market dynamics.

The brokerage has resumed its coverage on PFC, with a target of Rs 550 per share, implying 41.6% upside and has initiated coverage on REC with a target of Rs 600 apiece, with upside potential of 35%.

According to the brokerage, a paradigm shift, favouring renewables, is in the making in India’s power sector; and with it, shall emerge a Rs 43 lakh crore tide of capex towards generation and transmission by 2032, as per CEA estimates. "Power Finance Corporation and Rural Electrification Corporation, being traditional power financiers, individually command 20% market share in financing the power sector as per the company estimate," it said.

These companies' stronger asset quality and balance sheets, helped by stressed asset resolutions; and healthier distribution companies, given various government initiatives, will help them reap benefits.

The past three years saw India’s renewables capacity increasing annually by 16–17 GW on an average, while total installed capacity expanded at an average of 20 GW to 442 GW, ICICI Securities noted. "Over the next eight years, i.e., until FY32, total incremental capacity may potentially climb 56 GW per year, which is 2.8 times its historical average; thus, elevating installed capacity to 900 GW, as per CEA," it said.

The brokerage expects compounded annual loan growth rate of 14% over FY24–27 for PFC, with calculated margins improving a tad to 3.5–3.6% as against 3.4% for FY24. "Separately, 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, adding that it estimates credit cost to be in the range of 15 bps and 5 bps over FY25–27 and return on assets/return on equity ratio at 3%/19%.

In March 2019, PFC had acquired a majority stake (52.63%) in REC from the government and REC became a subsidiary of PFC. This merger has its own constraints, according to the brokerage, with respect to borrower exposure limit in raising funds, as well as concentration of exposures in a single entity.

"Also, given that it has its own strategic role to play as a nodal agent for various government schemes, merger approach would not be very synergistic, in our view," it said.

For REC, fast-tracked growth for its newly entered infra and logistics segment, which builds confidence on its execution capabilities for growth prospects, the brokerage said. It expects the company to deliver an AUM CAGR of 17% over FY24–27E, with calculated margins hovering in the range of 3.5–3.7%, compared to 3.5% for FY24.

"Further, strengthening of asset quality and stressed asset resolutions falling in place bodes well for REC," the brokerage said. "We envision provision write-backs shall 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 more than 20% over FY24–27E, ICICI Securities said.

Meanwhile, Macquarie has an 'outperform' rating on both the stocks. It has a target of Rs 700 for REC, implying 52% upside, while for PFC, it has a target of Rs 660, implying 63% upside. It does not expect downgrade of any large accounts to GNPAs for both REC and PFC and expects credit costs to remain negative. Growth is expected to remain broadly stable at 15%/13% YoY for REC/PFC and structural story is intact. Credit risk is projected to remain lower, it said.