UBS has initiated coverage on Power Finance Corporation (PFC) and REC Limited, assigning both stocks a “Buy” rating, driven by their strategic shift towards financing high-growth renewable power generation and infrastructure projects in India.
According to UBS, PFC and REC are no longer viewed as traditional power capex financiers, but as pivotal players in funding India’s renewable energy boom and related infrastructure expansion. Currently, nearly 20% of their combined loan book is allocated to renewables and infrastructure, a figure UBS expects to double to approximately 40% by FY29, in line with India’s plan to double its renewable energy capacity over the next five years.
The growth of PFC and REC is anticipated to be further bolstered by government distribution schemes that provide a clear path for consistent early to mid-teens loan growth in the sector. This shift in loan mix is also positively impacting the credit quality of these institutions, as renewable energy loans are typically shorter in tenure, smaller in size, and carry lower risk compared to thermal power loans. Additionally, the resolution of legacy assets continues to provide a near-term boost to their financial performance.
UBS highlights the access to long-term funds at reasonable rates, supported by implicit government guarantees, as a significant competitive advantage for both PFC and REC. The financial institutions have also been in an EPS upgrade cycle, averaging over 15% growth annually over the past three years. UBS expects this momentum to continue, with robust Return on Equity (ROE) projected to remain between 18-20%.
Given these factors, UBS has set price targets of ₹670 for PFC and ₹720 for REC, implying 1.6x and 2x FY26E Price-to-Book Value (P/BV) ratios, respectively.
