Bernstein cuts PFC, REC target prices as bank competition weighs on loan growth
The brokerage retained its Outperform rating on both stocks but reduced its target price for PFC to Rs 465 from Rs 500. It also lowered the target for REC to Rs 410 from Rs 420. Based on the August 21 closing prices, these targets imply potential returns of around 37% for PFC and 41% for REC.
Bernstein also reduced its projected loan book growth CAGR for both companies between FY26 and FY28 to 7%, from approximately 10% earlier. As a result, its FY27 earnings-per-share estimate for PFC was cut to Rs 80 from Rs 87, while the estimate for REC was lowered to Rs 64 from Rs 65.
Banks emerge as a stronger rival
The biggest concern for PFC and REC is the return of banks to power-sector lending. After largely staying away from the sector during the previous downturn, banks have become more comfortable financing renewable projects with established power purchase agreements.
Bernstein said it had come across several instances of banks refinancing projects previously funded by PFC and REC. This is putting pressure on the two companies’ renewable loan books and could limit growth as banks become more active in the segment.
The brokerage noted that PFC’s renewable loan growth has slowed sharply after expanding at a compound annual growth rate of around 30% between FY24 and FY26.
Renewable growth is shifting away from their core market
Bernstein also pointed to changes in the mix of renewable capacity additions. Utility-scale projects, where PFC and REC have a stronger presence, are facing delays due to transmission constraints.At the same time, a growing share of new solar capacity is coming through rooftop projects and the KUSUM scheme, areas where the two financiers have limited exposure. These factors could further restrict loan growth in the renewable segment.
Better DISCOM health brings mixed impact
The improving financial health of DISCOMs is positive for the power sector, but it may reduce near-term borrowing demand from one of PFC and REC’s key customer segments.
Bernstein said the gap between the average cost of power supply and the average revenue realised became favourable for the first time in FY25. Lower losses and better tariff discipline have reduced the need for DISCOMs to borrow for loss funding.
Although higher power demand and rising spot prices could increase their working capital requirements, DISCOMs are also becoming more cautious about taking on debt. Some are even considering equity-market listings to improve their financial position. Bernstein therefore expects loan growth in this segment to remain modest.
Forex exposure remains a risk
Foreign-currency borrowings are another area of concern. Around 20% of PFC’s and 27% of REC’s borrowings were in foreign currency as of March 2026, with most of the exposure denominated in US dollars and euros.
While more than 95% of these borrowings are hedged, Bernstein noted that the companies rely largely on options rather than swaps. This provides protection only within a specific range of currency movements.
The brokerage said PFC and REC recorded forex losses of Rs 1,600 crore and Rs 1,200 crore, respectively, in FY26. Rising hedging costs could add to the pressure.
Despite the concerns around growth and currency movements, Bernstein does not see any immediate asset-quality issues. Gross non-performing assets declined for both companies in the first quarter of FY27.
PFC’s NPA ratio fell to 0.15% from 0.38% a year earlier, while REC’s declined to 0.11% from 0.24%. However, Bernstein cautioned that the phase of large credit reversals may be nearing its end, meaning credit costs could gradually start rising.
The brokerage said the two companies continue to trade at attractive valuations, at roughly five times FY27 earnings, with PFC trading below book value and REC close to book value. However, it believes investors may need to wait a few quarters for loan growth to recover, unless PFC and REC successfully build new lending segments such as data centres and other infrastructure.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)
