Emkay Global recommends 'BUY' on Power Finance Corp and Rural Electrification Corp stocks

Emkay Sees Value in PFC & REC, Targets 1.5x & 1.9x FY26E P/BV

Emkay Global Financial Services Ltd. put forth its stance on recommending a BUY on Power Finance Corp Ltd (PFC) and Rural Electrification Corporation Ltd (REC), with a one-year target price of Rs 600 (at standalone FY26E P/BV of 1.5x and 25 percent holdco discount on about 52.6 percent stake in REC), and REC with one-year target price of Rs 650 (implying 1.9x FY26E P/BV).

This is driven by three primary factors: foreseeing a long and visibly high growth runway (planned capex of over Rs 33 lakh crore set aside for FY 2023-32 in generation, transmission, and distribution); Lessons learnt from the previous cycle (i.e, project gestation risk, PPA/FSA risks, etc., and a host of Central Government-driven reforms addressing the sustainability issue in the sector; valuations, despite being higher (1YF Dec-25E P/BV of 1.5x for REC, and 1.14x for standalone PFC) than the long-term median of 0.7x, remain palatable for the growth and profitability profile, along with near clean-up of past baggage, said the brokerage.

Furthermore, a sustained double-digit loan growth, stable margins, and improving asset-quality are among the elements favouring robust earnings visibility for companies in the sector, as per the firm. Despite offering consistent dividend payouts and maintaining strong return ratios, the firm’s belief lies in the sector’s ability to trade at a discount to their book value. The projected value thereon is approximately 13 percent, about 18 percent AUM CAGR for PFC/REC over FY24-27E, along with 19 to 20 percent estimation of ROE during FY 25-27E, respectively. This is expected to be driven by robust credit demand, write-backs, and net credit cost of -5bps to 5bps over FY25-27E.