PFC rose 240% in 2023. Will the rally continue this year?

PFC stock was up about 240% in 2023. (Image: Pixabay)
PFC stock was up about 240% in 2023. (Image: Pixabay)

Summary

  • Can the stock maintain its momentum? Find out…

For the markets, 2023 was a great year with almost every sector delivering decent gains.

Some sectors outperformed with prominent examples being power, PSU, and financial stocks.

One stock that fit into all three categories was Power Finance Corp (PFC). The stock was up about 240% in 2023. There were a few solid reasons for this run-up.

After such a stupendous performance, it’s natural to ask if can be sustained.

2024 has been a mixed year for the stock so far. The stock kept up the momentum from last year and rose about 16% in January. But it has fallen about 7% this month.

So, has the rally ended? It is difficult to say with any certainty. Investors can look at the reasons for the bull run in the stock and take a call on its prospects for 2024.

PFC in 2023

PFCis a state-owned maharatna company, established as an NBFC. It was incorporated on 16 July, 1986. It’s under the administrative control of the ministry of power.

The company offers term loans, short-term loans, equipment lease financing, transitional financing, etc., catering to various power projects across generation, transmission, and distribution segments.

It has also ventured into the infrastructure and logistics segment, focusing on e-vehicle fleets, charging infrastructure, roads, ports, metro rail, smart cities, and other large infrastructure projects.

As of writing, its market cap is about 1.32 trillion (tn). Its loan book size was a massive 9.54 tn as on 31 December 2023.

PFC has been aggressive in giving loans to the renewable energy sector over the last few years. It has grown its renewable energy portfolio at around 20% CAGR over FY19-23.

As far as financials go, PFC has done well recently. Its net interest income and net profit have grown at a CAGR of about 10% over the last five years.

Its aggressive lending has caused an increase in provisioning. As of the end of FY23 the amount set aside for bad loans was about 1.7 billion (bn).

However, the company has made significant efforts to collect pending payments from discoms in FY24. As of 31 December 2023, its net non-performing assets (NPA) fell to 0.86% compared to 1.15% from the same period a year ago.

The company’s return on assets (ROA) and return on equity (ROE) are excellent at 2.5% and 20% respectively.

PFC is also a good dividend payer. Except for FY19, the company has been consistently paying dividends since 2007. The dividend payout ratio stands at 22%.

The reason for the run-up in the stock was the company’s push towards giving loans to the renewable energy sector. This has ensured that the growth in net interest income and thus the net profit, has remained solid and consistent.

This fact combined with efforts of the management to reign in NPAs has made PFC a favourite among investors. Other reasons for the run-up in the stock price include overall positive sentiment in the market, and renewed interest in PSU stocks, especially PSU financial stocks.

Even so, the company itself has performed admirably. This is a good example of a stock being rewarded by the market when investors have assurance in the underlying fundamentals of the business.

However, it would be wrong to say that its fundamentals were the main reason for the stock’s multibagger returns last year.

One of the biggest reasons was the market treating the stock as a proxy play on India’s renewable energy sector.

This sector has caught the fancy of investors. Any stock with a ‘renewable’ or ‘clean energy’ tag on it, did very well in 2023. The market knows this sector will need major long-term financing. What better stock to bet on than market leader PFC?

PFC in 2024

First, investors need to understand that multibagger returns are not possible year after year. There will be some years when even a great long-term investment underperforms. That is just the nature of the stock market.

PFC’s performance in 2023 was extraordinary. One look at the stock’s long-term chart will make that abundantly clear.

 

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The stock has been a big underperformer for many years due to the poor performance of the power sector in general along with serious NPA issues in the past.

Once this scenario changed for the better, the stock took off in late 2022, especially because it had a big tailwind to support its rise, i.e., the renewable energy megatrend.

In conclusion, it would be incorrect to expect gains similar to 2023 from the stock of PFC in any calendar year, especially 2024.

The market has priced in the multiple positive changes to the company’s long-term prospects, in just about 15 months or so. Instead of a steady rise upward, the stock went up almost parabolically.

Such a rise is not sustainable beyond a point. This does not mean the stock will crash. But it does mean that much of the gains investors expected from the stock have already been achieved.

If an investor is considering the stock as a new investment, this is the key point to keep in mind while analysing the stock.

Happy investing.

Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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