Elara Securities sets record target prices on multibagger PSU stocks PFC and RECL; here’s why

The significant increase in power demand has led to a strong performance in the stock prices of companies in the power sector. This includes power generators, distributors, and financing firms, all of which have reached record highs in recent months. 

Among these, Power Finance Corporation (PFC) and Rural Electrification Corporation (RECL) have delivered phenomenal returns in the last one-year period, more than doubling their investors' wealth. Shares of REC achieved a gain of 300%, while those of PFC gained 245% in a year. 

Both companies are government-owned entities classified as central public sector undertakings operating under the Ministry of Power. They play a vital role in financing projects across the entire power sector value chain, encompassing activities from power generation to distribution.

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Going forward, the sharp bull run in PFC and RECL is likely to continue as per the projections made by domestic brokerage firm Elara Securities. The brokerage has identified the following four key growth levers for power financiers:

1] Renewed interest in thermal capacity addition following the Government of India's announcement regarding the addition of 80 GW and the emphasis on grid stability.

2] Government initiatives such as the Renewable Energy Development and Solar Scheme (RDSS), along with LPS schemes, are expected to drive funding opportunities in the power sector. 

3] Robust funding potential for renewable energy projects worth ₹26 trillion during FY22–32, including opportunities in rooftop solar financing, estimated at ₹12 trillion. 

4] Increasing infrastructure credit uptake due to the availability of assets like airports, roads, data centres, and electric vehicle charging stations, along with a strong order book across firms.

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Additionally, a promising pipeline of sanctions for renewable and infrastructure projects, coupled with a gradual increase in thermal project sanctions until emerging technologies mature, is expected to further drive growth, the brokerage added. 

Therefore, it expects a 15–16% loan CAGR for Power Finance Corporation and 17–18% for Rural Electrification Corporation during FY23–26E.

Stabilising factor 

The brokerage said that both PFC and RECL stand poised to sustain NIM at 3.5% during FY24–26E, underscored by a three-year transmission lag, an increased share of fixed rate borrowings curtailing the impact of system rate changes on cost, asset repricing benefits reflecting in yield for the next two years, and the maintenance of a fair loan mix backed by thermal (carry risk premium) & distribution assets, which offset competitive renewables share.

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Although the share of renewables is expected to increase for both financiers, the brokerage anticipates a limited NIM impact. This is due to the stability expected in setup costs and tariffs, as well as the timely receipt of subsidies. Additionally, since infrastructure projects have a longer gestation period, they are unlikely to significantly affect yields over the next 2–3 years. 

Superior asset quality

"With no incremental slippages in the past 8–12 months and no likely additions, we rule out the need for NPA provision. While write-backs can also be expected with the pace of asset resolutions, we have yet to factor this into our estimates," said the brokerage.

Therefore, Elara expects both financiers to be in an NPA downcycle for the next 3–4 years, and it projects a 2-3% GNPA on a high base, which it says is the best-in-class asset quality in the industry.

Attractive risk-reward 

According to the brokerage, Power Finance Corporation is trading at an attractive valuation of 1.02 times the estimated book value for FY25E. Meanwhile, RECL's valuation stands at 1.4 times the estimated book value for FY25E. 

In light of this, the brokerage maintains its 'Buy' recommendation, setting record target prices of ₹569 apiece for PFC and ₹582 apiece for RECL.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.