CLSA upgrades PSU stocks REC and PFC to 'High Perform'; sets target price at ₹525

Global brokerage firm CLSA has revised its ratings on Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) to ‘High Perform’ from ‘Outperform.’ The upgrade is based on strong loan growth, resilient return on equity (ROE), and attractive dividend yields, making both stocks compelling investment opportunities despite recent market corrections.

CLSA has also cut its target price for both REC and PFC to ₹525, adjusting downward from the earlier estimates of ₹590 and ₹540, respectively.

CLSA noted that asset quality concerns remain minimal, as lenders are exercising strict control over project approvals and agreements amid the ongoing capital expenditure cycle. Despite some procedural slowdowns, the brokerage remains confident in the mid-teen loan growth forecast for REC and PFC in FY26-27.

REC: High Perform | Target Price: ₹525

CLSA upgraded REC Ltd to 'High Conviction Outperform,' emphasizing its superior loan growth, robust ROE, and high dividend yield. The brokerage highlighted that the PSU stock is currently trading at just 0.93 times its FY27 book value, presenting an attractive valuation.

"Best in class loan growth, ROE and dividend yield places REC apart from others, but the stock is trading only at a 0.93x adjust PB FY27CL Accordingly we upgrade our rating from O-PF to HC O-PF on a lower Rs525 target price (from ₹590) based on a 1.3 times FY27 adjusted BV," CLSA said.

REC’s loan growth has been solid over the past 5-7 quarters, ranging between 15 percent and 21 percent. CLSA noted that even with some approval delays, the existing sanction pool alone could sustain strong loan growth over the next two years.

The brokerage pointed out that REC's asset quality has significantly improved, with gross non-performing assets (NPAs) declining to 2 percent as of December 2024—returning to pre-FY16 levels. Notably, REC has not seen any major slippages in the past two and a half years.

CLSA also emphasized REC's strong management team and execution capabilities, which have contributed to its sustained loan growth, superior ROE of 19-20 percent, and a dividend yield of 3.5 percent—outpacing sector peers.

"Among large lenders, REC stands out with better delivery on loan growth expectations (15 percent versus 12-14 percent for others), ROE (19-20 percent versus 13-15 percent for others) and dividend yield (3.5 percent versus 0-3 percent for others)," CLSA said.

PFC: High Perform | Target Price: ₹525

For PFC, CLSA highlighted that 59 percent of the sanctioned loans over the past 2.75 years remain undisbursed, ensuring a strong pipeline to support double-digit to mid-teen loan growth in FY26-27. The brokerage stated that PFC's legacy asset quality issues are now largely behind, and the outlook for new disbursals remains favorable.

CLSA pointed out that PFC continues to outperform in loan growth, ROE, and dividend yield, making it an attractive investment at current levels. The stock currently trades at 0.76 times its FY27 price-to-book ratio, which the brokerage finds appealing given its strong fundamentals.

Furthermore, CLSA reassured investors that asset quality concerns should remain limited, as PFC, like REC, maintains stringent controls over project approvals during the ongoing capex cycle.

Stock Performance Trends

Despite their strong fundamentals, REC and PFC have faced stock price declines over the past year. REC has dropped over 18 percent, while PFC has declined around 8 percent in the same period.

REC lost nearly 20 percent in February, marking its third straight month of losses after shedding 10 percent in January and 6 percent in December. However, in the first two sessions of March, the stock gained 4 percent.

PFC, too, saw a 14 percent decline in February, extending its losing streak after falling 6 percent in January and 9.5 percent in December. The stock has shown some recovery in March, advancing 4.7 percent in the first two sessions.

With CLSA's upgraded ratings and positive outlook on loan growth, ROE, and asset quality, both REC and PFC present strong investment cases. The current valuations appear attractive, especially given their high dividend yields and improving fundamentals. While near-term market volatility may persist, long-term investors could find opportunities in these stocks, particularly as the broader capital expenditure cycle unfolds.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.