1 week Ago By CNBCTV18
Brokerage firm Emkay Global has initiated coverage on shares of state-run power financing companies REC Ltd. and Power Finance Corporation (PFC), assigning both a 'Buy' rating. Share Market View All Nifty Gainers View All Company Value Change %Change Emkay has set a price target of ₹650 for REC and a target of ₹600 for PFC , implying a potential upside of 25% and 31%, respectively, from Thursday's closing levels.
Stocks Rating CMP TP Upside REC Buy ₹518 ₹650 25% PFC Buy ₹459 ₹600 31% Both REC and PFC are currently down more than 20% from their record high levels of ₹654 and ₹580, which they hit in July 2024. Emkay wrote in its note that the controlled upcycle in power capital expenditure and lending is here to stay, and both REC and PFC offer an optimal pathway to capitalise on this trend. Emkay's optimistic stance is underpinned by three factors: 1) With planned capex of over ₹ 33 lakh crore during FY23-32 in Generation, Transmission, and Distribution, the growth runway is long and visibility high.
2) Lessons learnt from the previous cycle (i.e. project gestation risk, PPA/FSA risks, and so on), a host of Central Government-driven reforms addressing the sustainability issue in the sector by attempting to resolve the burning issue of who pays the bill, continued benign competition from banks in the power space, and gradual diversification approach adopted by PFC and REC provide reasonable comfort around asset quality issues and, hence, added confidence around profitability.
3) Valuations, despite being higher (one-year forward December 2025 estimated price-to-book value of 1.5x for REC and 1.14x for standalone PFC) than the long-term median of 0.
7x, remain reasonable considering the growth and profitability profile, along with the near-resolution of past issues. The brokerage further said that sustained double-digit loan growth, stable margins, and improving asset-quality support robust earnings visibility for companies in the sector. Despite offering consistent dividend payouts and maintaining strong return ratios, Emkay believes that sector players continue to trade at a discount to their book value.
The brokerage projects a 13%/18% AUM CAGR for PFC/REC over FY24-27E, along with 19%/20% ROE during FY25-27E, respectively. These projections are driven by robust credit demand, write-backs, and a net credit cost ranging from -5bps to 5bps over FY25-27E. Shares of both REC and PFC settled over 2% higher at ₹519.
95 and ₹459.45, respectively, on Thursday..
