Foreign brokerage firm UBS has recommended a ‘buy’ rating on two PSU multibagger stocks, highlighting their strong growth prospects driven by the shift towards renewable energy and infrastructure financing.
UBS anticipates that REC and PFC will have similar growth drivers and trajectories, with REC expected to grow slightly faster than PFC.
The brokerage sees both PFC and REC as key financiers of high-growth renewable power generation and infrastructure capital expenditures (which are three times that of power capex) in India, rather than traditional power capex financiers.
At present, REC is trading at nearly a 35 percent premium to PFC’s standalone multiple, as against the historical premium of 25 percent. This has led UBS to favour PFC over REC.
Around 20 percent of their total loan book is now allocated to renewables and infrastructure, and UBS estimates this figure could reach around 40 percent by FY29, as India is set to double its renewable capacity over the next five years.
UBS notes that growth will be supported by government distribution schemes, providing visibility for early to mid-teens loan growth in the sector.
The changing loan mix is also affecting credit quality dynamics, as renewable loans tend to have shorter tenures with lower risk compared to thermal plants, while the resolution of legacy assets is expected to be a near-term tailwind.
Additionally, access to long-term funds at reasonable rates, due to implicit government guarantees, remains a significant advantage, according to UBS.
The brokerage anticipates that both PFC and REC stocks will continue to see upgrades in earnings per share (EPS) and expects a return on equity (RoEs) to remain strong, ranging between 18-20 percent.
UBS projects that incremental loan growth for both companies will be driven by India’s energy transition-related capex and involvement in state-backed infrastructure projects.
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It estimates an annual total capex of Rs. 4 lakh crore in the power sector, with Rs. 1 lakh crore allocated to renewable energy generation and Rs. 1.5 lakh crore each for transmission and distribution (T&D).
The brokerage anticipates that PFC and REC will maintain access to funding at competitive rates, even with a large net issuance of 0.4 percent of GDP. This is attributed to their diversification into global savings, with foreign borrowings now constituting 18-28 percent.
UBS expects both companies to benefit from the softening yields on government securities (G-Secs), potentially achieving a 20-30bp reduction in their cost of funds.
REC Limited
With a market capitalisation of Rs. 1.64 lakh crores, the stock moved up by nearly 2.8 percent on BSE to Rs. 636.15 on Wednesday, as against its previous closing price of Rs. 618.6.
UBS has issued a ‘buy’ rating for REC, setting a target price of Rs. 720 per share, indicating a potential upside of nearly 15 percent from Thursday’s closing price of Rs. 626.
The company’s revenue from operations stood at Rs. 13,079 crores in Q1FY25, rising by 17.8 percent YoY from Rs. 11,104 crores in Q1FY24, accompanied by a growth in the net profit by 16.6 percent to Rs. 3,460 crores from Rs. 2,968 crores, during the same period.
The stock has delivered multibagger returns of nearly 156.2 percent in one year, and around 47.5 percent of positive returns year-to-date.
Incorporated in 1969, REC Limited is engaged in extending financial assistance across the power sector value chain and is a Systemically Important (Non-Deposit Accepting or Holding) NBFC registered with the RBI.
Power Finance Corporation Limited
With a market capitalisation of Rs. 1.83 lakh crores, the shares of an Infrastructure Finance Company moved up by 3.3 percent on BSE to Rs. 556.6 on Wednesday, as against its previous closing price of Rs. 539.05.
UBS has issued a ‘buy’ rating for PFC, setting a target price of Rs. 670 per share, indicating a potential upside of nearly 21 percent from Thursday’s closing price of Rs. 555.7.
The company’s revenue from operations stood at Rs. 24,717 crores in Q1FY25, rising by 17.6 percent YoY from Rs. 21,009 crores in Q1FY24, accompanied by a growth in the net profit by 20 percent to Rs. 7,182 crores from Rs. 5,982 crores, during the same period.
The stock has delivered multibagger returns of nearly 156.8 percent in one year, and around 40.4 percent of positive returns year-to-date.
Incorporated in 1986, Power Finance Corporation Limited (PFC) is engaged in extending financial assistance to the power, logistics and infrastructure sectors. It is a Systemically Important Non-Deposit taking NBFC registered with the RBI as an Infrastructure Finance Company.
Written by Shivani Singh
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