UBS is betting big on power financiers and has initiated coverage on the sector with a Buy rating on PFC and REC. In its report, UBS stated that India’s power sector is undergoing a significant shift, and companies like Power Finance Corporation (PFC) and REC stand to benefit immensely. The brokerage has set a price target of Rs 670 for PFC and Rs 720 for REC, implying an upside of nearly 66% and 76% in each stock.
As per the brokerage house report, these two government-backed institutions are now playing a key role in funding India’s transition to renewable energy and infrastructure development. The brokerage highlighted in its report that nearly 20% of PFC and REC’s total loan book is already allocated to renewables and infrastructure. This share is expected to grow to around 40% by FY29 as India aims to double its renewable energy capacity over the next five years.
“The energy transition is driving a structural change in financing needs. PFC and REC are well-positioned to capitalize on this shift,” added the brokerage firm.
India’s energy is continuously evolving rapidly. As per the brokerage report, incremental loan growth for both PFC and REC will be fuelled by rising capital expenditure in renewables and state-backed infrastructure projects.
With ongoing government initiatives like the Revamped Distribution Sector Scheme (RDSS), loan growth is expected to remain in the early to mid-teens. “Distribution reforms and infrastructure push provide a solid growth runway for these financiers,” the brokerage added.
The renewables and infrastructure has changed the credit quality landscape. The brokerage points out that renewable loans are shorter in tenure, smaller in size, and carry lower risks compared to thermal projects. In addition to this, the resolution of legacy non-performing assets (NPAs) has strengthened balance sheets.
“Over the last two to three years, PFC and REC have made significant progress in resolving stressed assets, which has improved their profitability,” UBS noted. The brokerage expects nearly Rs 30 to Rs 40 billion in write backs from NPAs in FY25-26 as investor interest in stressed assets grows.
UBS on Power Financiers: Competitive fundraising
One of the biggest strengths of PFC and REC is their ability to access long-term funds at competitive rates. As per the brokerage, both companies raised Rs 1.1 trillion in net borrowings, accounting for 0.4% of India’s GDP. They have also diversified their borrowing sources, with foreign borrowings now making up 18-28% of total funding.
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