PFC has gained over 240 percent in the last one year, while REC has gained over 300 percent.
Story continues below Advertisement Remove AdAnalysts believe that despite the stupendous rise in prices, the stocks are relatively undervalued.
REC and PFC are the nodal agencies responsible for financing power sector projects overall.
Under this, analysts say that REC will have the opportunity to finance rooftop solar developers for commercial properties.
Historically, both REC and PFC have traded below book value and were looked upon as being at the mercy of the government.
As demand for power grows, analysts see an investment case for PFC, REC
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Power finance stocks REC and PFC have been rallying in the last few sessions on the back of strong Q4 earnings.
The recent rise comes on top of the fireworks these stocks have displayed in the past year. PFC has gained over 240 percent in the last one year, while REC has gained over 300 percent. Can the momentum sustain?
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Analysts believe that despite the stupendous rise in prices, the stocks are relatively undervalued. Besides the improving financial strength of the two power financiers, a steady rise in power demand in the country, makes for a strong investment case.
Also read: REC stock hits 52-week-high on stellar Q4 results; company aims to be NPA-free by FY25-end
Stellar earnings
In Q4FY24, REC reported a 33 percent rise in net profit on-year to Rs 4,079 crore, thanks to a healthy growth in core income and a provision write-back.
Revenue from operations also grew 25 percent on-year to Rs 12,613 crore for the same quarter. The stock closed around 8.9 percent higher at Rs 552 on May 2. While PFC is yet to announce its fourth-quarter earnings, the stock gained nearly 6 percent to close at Rs 467.50, buoyed by positive sentiment.
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According to Shweta Daptadar, research analyst and vice president, equities research, at Elara Capital, REC's Q4 performance was largely driven by asset quality resolutions at Lanco Amarkantak, which led to write-backs of around Rs 700 crore.
Earlier this year, Adani Power said it had received creditors’ approval for a resolution plan to acquire insolvent Lanco Amarkantak. Additionally, she noted that the company has said it targets loan/AUM growth of 15-20 percent YoY , with the core power portfolio, specifically thermal, being the biggest driver.
Growth driver
According to Prasanna Bidkar, portfolio manager at Paterson PMS, factors like the focus on state-backed assets, and loans to quality corporates investing in renewables, driven by segments like roof-top solar and other high-ticket infrastructure projects, not only offer good business visibility but also keeps it on a credible growth path.
"Adding more appeal to this is the improving asset quality," he adds. REC’s NPAs are expected to decline to 2 percent in FY2025, compared to 2.5 percent in FY24. It is already down from 3.4 percent in FY2023.
Even as the receding bad loans pile makes these companies healthier, the more important trigger for growth is the optimism around the power sector itself.
REC and PFC are the nodal agencies responsible for financing power sector projects overall. This means they are direct plays on the growing power demand.
Peak power demand
According to Central Electricity Authority (CEA) data, peak power demand is expected to rise to around 260 GW in FY25, against 243 GW in FY24, with peak demand being seen in September 2024.
According to the Ministry of Power, the total installed thermal power capacity is expected to be 283 GW by FY32 from the current 214 GW and non-fossil-fuel-based capacity to be 500 GW by FY32, from the current 135 GW.
Renewables itself is a big growth opportunity. Daptadar says, "Currently, there is a lot of impetus on renewable energy. The government target means we need to add about 50 GW annually from 16 GW currently. Imagine the kind of scope that lies ahead," she noted. This requirement, she explains, will translate into a funding opportunity of almost Rs 12 lakh crore.
"That's where PFC and REC will play a bigger role," she adds.
The push for solar rooftops will also act as a huge growth opportunity. The government has also introduced a rooftop solar financing opportunity through the Pradhan Mantri Kusum Yojana. Under this, analysts say that REC will have the opportunity to finance rooftop solar developers for commercial properties.
Besides, opportunities also stem from the rise in demand for EVs, India's extensive railway network, and plans to increase the freight share of railways, along with initiatives like the Eastern and Western Freight Corridors, which all rely on electrification.
Still undervalued
Most market specialists believe that the sector is still undervalued, trading at a lower PE than peers, making a strong investment case. REC is currently valued at 2.38 P/B, while PFC is valued at 1.8 P/B.
On the basis of P/E also, they seem to be valued below-market averages. Vikas Gupta, founder, Omniscience Capital, notes that the stocks still trade at single-digit P/E ratios, which is considerably low, compared to the market average of 22–23 P/E.
The undervaluation, he says, is due to the lingering effects of the past. Due to high NPAs (non-performing assets) in the power sector, particularly around 5–6 years ago, the market perception of these stocks have been negative. Despite recent improvements and the clean-up of NPAs, market sentiment hasn't fully adjusted yet, he says.
Historically, both REC and PFC have traded below book value and were looked upon as being at the mercy of the government. Analysts say things have changed now. "The government, through its own capital outlay and schemes like RDSS (Revamped Distribution Sector Scheme) and LPS (Late Payment Surcharge) on the distribution side, has been supporting discoms as well as lenders. The government today is more keen on discoms paying off their outstanding dues to generating companies as well as to lenders like PFC and REC. There is government support, plus subsidies are coming in advance and improving state health," says Daptadar. Under RDSS, discoms can access funds for pre-paid smart metering, system metering, and distribution infrastructure upgrades. LPS require discoms to clear their legacy dues in equated monthly instalments (EMIs) without incurring a late payment surcharge.
Both PFC and REC have already seen some re-rating of valuations because of declining bad loans but the continuing NPA downcycle may offer more upside.
"REC aims to reach zero percent net NPA by FY25. They even mentioned in their interaction, post-results, that nine assets out of 13 are going to get resolved in 2025 itself. They have made almost 100 percent provisioning against these nine assets, which are in NCLT (National Company Law Tribunal)," she adds. Analysts believe that, over the next 6-9 months, the stocks look upbeat.
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