Bernstein Cuts PFC, REC Targets on Slowing Loan Growth
By Business Desk
Bernstein revises target prices for Power Finance Corporation (PFC) and REC downwards due to a significant slowdown in loan book growth and increased competition.
Global brokerage Bernstein has adjusted its target prices for state-run lenders Power Finance Corporation (PFC) and REC, citing an overestimation of their loan book expansion. This revision comes as both companies face a significant slowdown in their lending activities.
Key Target Price Adjustments
- PFC’s target price lowered to Rs 465 from Rs 500, implying 1x FY27 price-to-book.
- REC’s target price reduced to Rs 410 from Rs 420, implying 1.1x FY27 book.
- Both stocks maintain an ‘Outperform’ rating from the brokerage.
The decision by Bernstein follows a notable deceleration in loan growth. PFC’s loan book contracted by 2% quarter-on-quarter in Q1FY27, while REC’s book recorded only 1% growth during the same period.
Drivers Behind Slower Growth Estimates
Bernstein has consequently cut its loan book growth Compound Annual Growth Rate (CAGR) estimate for both companies to 7% between FY26 and FY28, down from approximately 10% previously. This slower trajectory is attributed to several factors:
- Increased competition from commercial banks in renewable energy financing.
- A strategic shift in solar capacity additions towards rooftop and KUSUM segments, areas where PFC and REC have limited market presence.
- Improved financial health of state power distribution companies (DISCOMs), which reduces their reliance on loss-funding from these lenders.
The brokerage specifically highlighted instances where banks have refinanced existing PFC-REC loans at more competitive rates. Furthermore, Bernstein noted a foreign exchange risk, as both companies hedge over 95% of their foreign currency borrowings primarily through options, leaving some exposure to currency fluctuations.
Asset Quality and Future Credit Outlook
Despite concerns over growth, the asset quality for both PFC and REC remains robust. Gross Non-Performing Assets (NPAs) for both entities saw a decline in Q1FY27.
However, Bernstein cautioned that the phase of credit reversals is largely concluding, anticipating a gradual increase in credit costs moving forward. Reflecting the downgraded growth projections, Bernstein also revised its FY27 Earnings Per Share (EPS) estimates, cutting REC’s to Rs 64 from Rs 65 and PFC’s to Rs 80 from Rs 87.