- Bernstein cut price targets for PFC and REC, citing slower loan growth than expected
- PFC's loan book shrank 2% QoQ in Q1FY27, while REC's grew just 1%
- Competition, shift in solar segments, and better DISCOM finances impacted growth forecasts
Global brokerage Bernstein has cut price targets for Power Finance Corporation (PFC) and REC, admitting it misjudged the pace of loan book growth at both state-run lenders even as asset quality held up.
"Did we fall for the value trap?" analysts led by Nikhil Nigania wrote in a note dated August 25, titled "PFC-REC: Once bitten, twice shy". The brokerage said it had "gone wrong on the loan book growth of these companies" following the up-cycle in FY23-24 (financial year 2023-24).
Bernstein cut PFC's target price to Rs 465 from Rs 500 earlier, implying 1x FY27 price-to-book, and lowered REC's target to Rs 410 from Rs 420, implying 1.1x FY27 book. Both stocks retain an Outperform rating.
Loan Growth Slows Sharply
PFC reported a quarter-on-quarter loan book degrowth of 2% in the June 2026 quarter (Q1FY27), while REC's book grew just 1%. Bernstein has cut its loan book growth CAGR (compound annual growth rate) estimate for both companies to 7% between FY26 and FY28, down from around 10% earlier.
Bernstein has cut target price of PFC, REC.
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The brokerage flagged three reasons: rising competition from banks in renewable financing, a shift in solar capacity additions toward rooftop and KUSUM segments where PFC-REC have limited presence, and improving DISCOM (state power distribution company) finances that are reducing loss-funding needs.
"We have come across many instances of them refinancing existing PFC-REC loans," the note said, referring to banks that are now lending to renewable assets at close to 8% for operating assets.
Bernstein noted that quarterly earnings calls have stopped since PFC and REC announced their merger, limiting management access. "We have been waiting for an earnings call, but post the merger announcement quarterly calls have stopped," the analysts said.
Forex Hedging Flagged As Risk
Bernstein also flagged foreign exchange risk. Both companies hedge over 95% of their foreign currency borrowings, but mostly through options rather than swaps, leaving partial exposure to currency swings. PFC and REC booked forex losses of Rs 1,600 crore and Rs 1,200 crore respectively in FY26. A 5% change in exchange rates would have a sensitivity of Rs 130 crore for PFC and Rs 80 crore for REC, per Bernstein's estimates.
Asset Quality Remains A Bright Spot
Despite the growth concerns, Bernstein said asset quality "remained strong". Gross NPAs (non-performing assets) fell from 0.38% to 0.15% year-on-year for PFC and from 0.24% to 0.11% for REC in Q1FY27. The brokerage cautioned, however, that "the credit reversals phase is largely over now" and credit costs are likely to rise gradually going forward.
With the growth downgrade, Bernstein cut its FY27 EPS (earnings per share) estimate for REC to Rs 64 from Rs 65, and for PFC to Rs 80 from Rs 87.
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