UBS initiates 'buy' on PFC, REC stocks, forecasts robust returns and loan growth

UBS forecasts early to mid-teens loan growth for both PFC and REC, driven by the government's distribution schemes and India’s energy transition and infrastructure projects

Shares of Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) increased by up to 2 percent following UBS's initiation of 'buy' calls on the stocks. The brokerage highlighted a strong growth outlook for both companies, driven by their strategic focus on renewables and infrastructure financing. The firm favors PFC over REC

UBS pointed to the energy transition and rising infrastructure investments as key growth drivers, emphasizing that these factors support positive market momentum.

The dynamics affecting these stocks are noted to be distinct from those observed in previous market cycles, it said, adding that the power sector financiers remain in earnings upgrade cycles and one could expect their "return on equities (ROEs) to remain robust at 18-20 percent."

UBS analysts view PFC and REC not as traditional power sector financiers but as key players in high-growth renewable energy, power generation and infrastructure investments.

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The firm noted that 20 percent of PFC and REC's total loan books are currently allocated to renewables and infrastructure. This figure is expected to rise to around 40 percent by FY29, as India aims to double its renewable capacity over the next five years.

The shift in loan composition is also impacting credit quality as renewable loans typically have shorter tenures, are smaller, and carry lower risks compared to thermal plant loans.

The resolution of legacy assets provides a short-term boost, according to UBS. Analysts also highlighted access to long-term funds at reasonable rates, bolstered by implicit government guarantees, as another significant advantage.

UBS forecasts early to mid-teens loan growth for both PFC and REC, driven by the government's distribution schemes and India’s energy transition and infrastructure projects. The firm has set target prices of Rs 670 for PFC and Rs 720 for REC.

It estimates annual capex in the power sector at Rs 4 lakh crore, with Rs 1 lakh crore allocated to renewable generation and Rs 1.5 lakh crore each for transmission and distribution (T&D).

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In the near term, ongoing distribution schemes like the Revamped Distribution Sector Scheme should support this growth. UBS expects PFC and REC to continue to have access to funds at competitive rates despite substantial net issuance of 0.4 percent of GDP as they have also diversified to tap global savings.

"We expect them to benefit from softening yields of G-Secs and build a 20-30bp cost of fund decline," the brokerage said.

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