PFC, REC stocks jump upto 7%; capacity expansion, clean energy push in play; will the rally sustain?

Power demand in India was up 4 percent YoY during April-Aug 2023, according to a Jefferies report. A contributing factor here being a 16 percent increase year-on-year in August 2023, which helped reverse the first quarter demand decline trend.

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Shares of power finance stocks REC and PFC surged as much as 7 percent on September 27, continuing the upward trend seen over the last year. REC stock was trading at Rs 283.90 at mid-day on NSE, up 6.2 percent from the previous close. PFC stock was trading at Rs 251.50, up almost 7.3 percent. Over the last two day (September 27-28), PFC and REC stocks have gained between 4-5%.

Also read: The clean energy revolution is moving too slowly

This trend has been observed in the thriving power sector, driven by increasing government and investor attention. Analysts attribute the rising interest in these stocks to robust power demand in August.

Power demand in India was up 4 percent Year-on-year during April-Aug 2023, according to a Jefferies report. A contributing factor here is a 16 percent increase year-on-year in August 2023, which helped reverse the first-quarter demand decline trend. Apart from manufacturing, agriculture also contributed to the demand.

For REC and PFC, another contributing factor has been the introduction of the Late Payment Surcharge Rule. Both companies, AK Prabhakaran of SEBI-registered IDBI Capital said, were traditionally trading below book and they had problems before because the power sector was not doing well. This included payment defaults and late payments by distribution companies. The introduction of the Late Payment Surcharge Rule ensured that outstanding dues and current bills were paid in time. This in turn helped in recovery for PFC and REC.

Prabhakaran adds “When you see NCLT cases also, power and steel assets have gone at a very good price, compared to other assets because these are physical assets. Wherever the NCLT case happened, the bank didn't lose much. In case of power assets, the write offs for REC and PFC were very minimum. This is something the market recognised."  But whether the current valuation is attractive, he said he has his doubts.

PFC's subsidiary REC's shares have already doubled this year, marking their best year after their listing year of 2009. Analysts tracking PFC have also given a buy recommendation for the stock.

When it comes to financials too, PFC has seen a bumper year. For the quarter ending June 2023, it reported a 30.6 percent year-on-year increase in net profit to  Rs 5,982.14 crore. The company had reported a profit of ₹4,579.53 crore in the year-ago period. Net NPA for the quarter also reached its lowest level at 1 percent from 1.57 percent in Q1 FY23. Additionally, Gross NPA’s declined by 148 bps from 5.02 percent in Q1 FY23.

Potential capacity expansion driving power sector optimism

Brokerage firm Geojit said it remains positive on power generation, distribution, and equipment manufacturing companies. With potential growth in generation capacity over the next few years, power companies -- whether conventional, solar, green, or wind -- will benefit, said Geojit's Gaurang Shah. Fundamentally, he said that they remain positive on the sector and fundamentally strong companies in the segment.

On September 26, Punjab National Bank (PNB) entered into a Memorandum of Understanding (MoU) with REC to jointly explore the possibility of funding the projects under the consortium arrangement. Under this partnership, REC and PNB will associate with each other to co-finance loans amounting to Rs 55,000 crore over the next three years.

Jefferies added that the power capex CAGR will accelerate to as high as 20 percent during FY23-26E, from just 2.2 percent in FY10-20. “As India enters a phase of capex-driven GDP growth, power intensity should rise,” the report said.

Renewable energy push by government, global funds' clean mandate makes power companies attractive

Analysts have also said that the government push for RE and increase in capex investments have added to the uptick in these stocks. In a previous conversation with Moneycontrol, Naveen KR, Smallcase manager and Senior Director, Windmill Capital, said that an increased focus on renewable energy and thermal power is what is attracting not only Indian but also foreign ESG investors, who are looking to put money in clean companies. Power companies are leading the RE space, he said, adding that it fits well with the ESG theme.

But while the segment is growing, Digant Haria, founder of Greed Edge Wealth, recently told Moneycontrol that while currently, one can look towards the segment for easy gains, the high valuations will be difficult to sustain in the long run although the segment will continue to boom. Haria also added that with an increase in focus on thermal and renewable energy, low margins in the segment could also prove to be a challenge to PEC and REC.

Other analysts have expressed similar concerns, saying that how sustainable the renewed interest in these stocks is something that we would have to wait and watch for.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.