PFC, REC jump over 4% as Bernstein initiates coverage with ’outperform’ rating, sets record target prices

Multibagger power financing stocks - Power Finance Corporation and Rural Electrification Corporation (REC) - jumped up sharply in today's session, with the former rallying 5.6% to ₹530, and the latter zooming 4.5% to reach ₹564.

Both stocks have already rallied up to 40% this year, and global brokerage firm Bernstein projects that their upward journey will continue.

The brokerage, in its latest note, has initiated coverage on both stocks with an 'outperform' rating. It views both of these stocks as leveraged power sector plays, despite the associated risks.

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Bernstein has set a target price of ₹653 for PFC and ₹620 for REC. Notably, these target prices represent new lifetime highs for both stocks.

In its note, Bernstein highlighted that REC and PFC, long overlooked by investors, now boast market capitalisations between $15 billion and $20 billion, with trading volumes nearing $125 million. Despite this, both stocks trade at relatively low trailing price-to-earnings ratios of 8 to 10 times.

The brokerage identified three types of investors: those who are enthusiastic about REC and PFC, those who question their relevance, and those who are unaware of these stocks.

Bernstein emphasised that investors are "underestimating the duration and intensity of this cycle." Over the past six years, 100 GW of generation capacity has been added, and Bernstein anticipates an addition of over 300 GW in the next six years.

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It also believes that power demand would continue to surprise and that the intensity of the current capex cycle could be at least double what it was in the previous year.

The brokerage pointed out that the risk of non-performing assets is significantly lower in the current cycle, with approximately 70% of PFC and REC lending directed to government entities and 30% to private renewables. While private lending has historically carried higher risk, renewable loans have a considerably lower default rate.

This is attributed to factors such as the short execution cycle of one to two years, compared to five years for thermal projects.

The brokerage also believes that provision reversals will benefit the companies in fiscal 2025. Reversing provisions reduces the liability amount on the balance sheet, thereby increasing the company's net income for that period.

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Earlier, domestic brokerage firm Antique Stock Broking noted that significant capital expenditure is planned for both thermal and renewable power generation. The recently released NEP report on transmission projects highlights an expected capex of ₹4.8 trillion over FY22–27.

Meanwhile, the latest business update from IREDA showed substantial improvement, with sanctioned loans growing manifold to ₹9,136 crore during April-June FY25. Additionally, disbursements rose by 67.61% to ₹5,320 crore during the period under review, up from ₹3,174 crore in the same period last year. Investors are expecting similar growth numbers from PFC and REC.

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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 taking any investment decisions.