We initiate coverage on power financing non-banking finance companies, or NBFCs, (Power Finance Corp. Ltd, or PFC, and Rural Electrification Corp. Ltd, REC) with a negative view.
While we remain positive on demand in the medium term as outstanding sanctions are robust, we expect credit growth to moderate due to the higher base. Asset quality is healthy for now, but the concentrated loan profile, absence of buffers on the balance sheet, mounting losses of state electricity boards, and concerns over coal availability/power project execution heighten the balance sheet risk, in our view.
Valuations remain at a premium to state-run banks despite similar return on equity (RoE) profiles (high RoEs for power financiers largely aided by near-zero provisions). We believe valuations could de-rate from current levels given the rising risk profile of the power sector. We rate PFC and REC as hold and sell, respectively.
Edited excerpts from a report by Religare Capital Markets.
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