Synopsis:
Power Finance Corporation is in focus after Motilal Oswal expects the stock to rise by another 28% citing that though the firm reported a muted Q2, hampered mainly by foreign exchange losses and lower loan growth, it is in a position to significantly benefit from this financing opportunity.
The shares of this leading NBFC company engaged in the Infrastructure Finance business are in focus after Motilal Oswal expects the stock to rise by another 28 percent from its current level. In this article, we will dive more into the rationale behind this.
With a market capitalization of Rs 1,24,991 crore, the shares of Power Finance Corporation Ltd are currently trading at Rs 378.80 per share, up by 1 percent from its previous day’s closing price of Rs 374.60 per share. Over the past five years, the stock has delivered a robust return of 356 percent, outperforming NIFTY 50’s return of 102 percent.
Analyst Comments
Leading domestic brokerage house, Motilal Oswal, has assigned a “Buy” call on the stock and has fixed a target price of Rs 485 per share, signalling an upside potential of 28 percent from its current market price.
The brokerage cited that Power Finance Corporation (PFC) maintained a good show of strength in the second quarter of FY26; however, the net earnings were a bit below expectations due to the foreign exchange losses and the deceleration of loan growth.
The company’s profit after tax was up by 2 percent YoY to Rs 4,460 crore, while the net interest income was up by 20 percent to Rs 5,290 crore, which clearly shows the power of the core lending business. But the other income suffered due to dividend drops, and the company had to report a Rs 500 crore forex loss. The good news is that operating costs declined 18 percent YoY, indicating the continuation of the company’s cost discipline, despite these challenges.
PFC informed that nearly 95 percent of its foreign currency debt is hedged and that a small unhedged portion is tied to the Euro-denominated bonds. The Euro was roughly 8 percent stronger against the US dollar during the first half of FY26, which resulted in temporary mark-to-market losses. However, since these borrowings are for the long term, the management believes the effect will be reversed if the exchange rate goes in their favor in the next quarters.
During the quarter, the firm experienced slight pressure on its margins as net interest margin declined by approximately 5 bps to 3.62 percent due to a slightly increased cost of borrowing. Meanwhile, its gross Stage 3 assets declined 5 bps QoQ, increasing to 1.87 percent and net Stage 3 assets remained stable at 0.37 percent. Provision coverage was maintained at about 80.2 percent, which is indicative of a conservative approach to risk by PFC.
While the loan book reached Rs. 5.61 lakh crore, representing a 14 percent YoY growth, the quarterly growth was only 2 percent due to the increased repayments. Disbursements were up 7 percent to Rs 49,800 crore, while repayments rose to 28 percent of the loan book. Renewable energy has kept its share of the total loan mix at about 15 percent, which is a signal of PFC’s uninterrupted investment in clean energy financing.
With a capital adequacy ratio of 21.6 percent, the company is in a strong capital position, allowing it to comfortably provide more loans in the future. The progress in the revival of the stressed assets is going on smoothly, especially in the case of the Sinnar Thermal Power Project, for which a resolution plan has been submitted to the NCLT. PFC has already provisioned nearly 80 percent for this exposure, thus alleviating the risk on this side.
PFC added that it is going to be on a steady growth path with a loan and profit CAGR expected to be around 10–12 percent over FY25–FY28. Eventually, the company will be able to maintain strong return ratios with RoE hovering between 18 and 20 percent.
Thus, it looks like PFC will be able to solve its problems of foreign exchange and slow loan growth one by one with the help of good financial conditions and controlled costs. The majority of its foreign exchange losses are just temporary and will probably be reversed when the currency rates stabilize.
The company, with its continuous lending activity, stable asset quality, and strong capital, seems to be moving towards gradual growth and is in a dominant position to take advantage of this.
Written by Satyajeet Mukherjee
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