Power Finance Corporation is a buy due to undemanding valuations
Posted: Fri Jun 27, 2025 8:02 pm
We interacted with Power Finance Corporation (PFC) to understand the company’s revised growth outlook, evolving sector dynamics and asset quality trends. Here are the key takeaways:
PFC has recalibrated its growth guidance to ~10-11% for FY26, reflecting a more cautious yet sensible approach to financing in India’s evolving power sector. This calibration in loan growth guidance from the previous higher growth expectations is primarily driven by significant technological transitions in energy generation and changes in the landscape of government support schemes. This strategic moderation in loan growth aims to ensure growth without incurring excessive balance sheet risks.
The company highlighted that energy transition from coal to renewables is fundamentally altering the nature of power-sector lending, with solar PV now gaining wide acceptance. Further, battery storage is emerging as a key enabler for integrating renewables into the grid, with government mandates now requiring two-hour storage across all new tenders.
PFC highlighted that government schemes, like LPS, LIS, and RDSS, have been major growth drivers in recent years. However, the landscape is shifting as LPS and LIS have concluded, and the RDSS scheme is also set to end by the end of FY26, impacting the momentum of scheme-led growth going forward.
PFC has significantly reduced its stressed asset portfolio, with Stage 3 assets declining from ~INR300-310b (at the peak) to ~INR110b over the last seven years. This improvement has been driven by the resolution of legacy thermal power projects and growing interest from strategic acquirers. Management shared that three key accounts, TRN Energy, Shiga Energy, and Sinnar Thermal, are in the advanced stages of resolution, either through one-time settlements or the NCLT process.
We expect a CAGR of ~12%/8% in AUM/PAT over FY25-27E, with RoA/RoE of 3%/18% in FY27E. Our BUY rating on the stock is predicated primarily on undemanding valuations of 0.9x FY27E standalone P/BV, with favorable risk-reward. Our SoTP (Mar’27E)-based TP stands at INR485 (based on 1.1x target multiple for the PFC standalone business and INR193/share for PFC’s stake in REC after hold-co discount of 20%).
PFC has recalibrated its growth guidance to ~10-11% for FY26, reflecting a more cautious yet sensible approach to financing in India’s evolving power sector. This calibration in loan growth guidance from the previous higher growth expectations is primarily driven by significant technological transitions in energy generation and changes in the landscape of government support schemes. This strategic moderation in loan growth aims to ensure growth without incurring excessive balance sheet risks.
The company highlighted that energy transition from coal to renewables is fundamentally altering the nature of power-sector lending, with solar PV now gaining wide acceptance. Further, battery storage is emerging as a key enabler for integrating renewables into the grid, with government mandates now requiring two-hour storage across all new tenders.
PFC highlighted that government schemes, like LPS, LIS, and RDSS, have been major growth drivers in recent years. However, the landscape is shifting as LPS and LIS have concluded, and the RDSS scheme is also set to end by the end of FY26, impacting the momentum of scheme-led growth going forward.
PFC has significantly reduced its stressed asset portfolio, with Stage 3 assets declining from ~INR300-310b (at the peak) to ~INR110b over the last seven years. This improvement has been driven by the resolution of legacy thermal power projects and growing interest from strategic acquirers. Management shared that three key accounts, TRN Energy, Shiga Energy, and Sinnar Thermal, are in the advanced stages of resolution, either through one-time settlements or the NCLT process.
We expect a CAGR of ~12%/8% in AUM/PAT over FY25-27E, with RoA/RoE of 3%/18% in FY27E. Our BUY rating on the stock is predicated primarily on undemanding valuations of 0.9x FY27E standalone P/BV, with favorable risk-reward. Our SoTP (Mar’27E)-based TP stands at INR485 (based on 1.1x target multiple for the PFC standalone business and INR193/share for PFC’s stake in REC after hold-co discount of 20%).