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UBS initiated coverage on power financiers like REC Ltd. and Power Finance Corp. with a ‘buy’ rating, given India’s high growth in renewable power generation and infrastructure capital expenditure.
The brokerage views Power Finance Corp. and REC as financiers of high-growth renewable power generation and infrastructure capex in India and not as traditional power capex financiers. It estimates a total capex of over Rs 4 lakh crore annually in the power sector.
It has a ‘buy’ rating on Power Finance Corp. with a price target of Rs 670 per share, marking an upside of 25% from the previous close. With another ‘buy’ rating, the brokerage sees REC rally to a target of Rs 720 apiece, implying an upside of 17%.
Nearly 20% of these companies’ total loan book is now in renewables and infrastructure, it said in an Aug. 29 note. This could reach around 40% by financial year 2029, as India doubles renewables capacity over the next five years, it said.
The return on equity is expected to remain robust at 18-20%, with access to long-term funds at reasonable rates remaining a key advantage. “In the near term, ongoing distribution schemes such as the Revamped Distribution Sector Scheme should ensure early to mid-teens loan growth.” They could also benefit from softening yields of G-Secs and build a 20-30 basis points cost of fund decline.
Legacy non-performing assets resolution has helped both power financiers’ profitability in the past two to three years, it said. The brokerage estimates nearly Rs 3,000-4,000 crore of write-backs are likely in fiscal 2025-26, as buyer interest in stressed assets has increased.
REC’s growth will be slightly ahead of Power Finance Corp. but their growth drivers and trajectory will be similar, UBS said. They prefer Power Finance Corp. over REC as the valuations are better for the former.