Power Finance Corporation sees FY27 growth support from Rs2.3 trillion sanction pipeline

Investment View and Recommendation

In its May 14, 2026 result update following Q4 FY26, Emkay Global Financial Services maintained its BUY recommendation on Power Finance Corporation (PFC). The broker sees growth support from a strong sanctioned-but-undisbursed pipeline of about Rs2.3 trillion and funding opportunities across renewable energy, battery storage, pumped hydro, transmission, DISCOMs, the EV ecosystem and broader energy-transition projects.

However, Emkay reduced its FY27E and FY28E EPS estimates by about 4-5 per cent, reflecting softer growth and margin assumptions.

Growth Outlook and Operating Performance

Standalone AUM grew 6.8 per cent year-on-year to Rs5.8 trillion in Q4 FY26, below Emkay's estimate. Quarterly disbursements were Rs400 billion, down 41 per cent year-on-year. Management attributed the lower loan growth to elevated prepayments and stressed-asset resolutions, stating that growth would have remained within its earlier 10-11 per cent guidance range without the prepayments.

Q4 FY26 net interest income was Rs55,225 million, down 6.6 per cent year-on-year but 1 per cent ahead of Emkay's estimate. Reported PAT rose 23.8 per cent year-on-year and 32.8 per cent quarter-on-quarter to Rs63,246 million, exceeding both Emkay's and consensus estimates by 25 per cent, primarily because of provision reversals and recoveries.

Asset Quality Improvement and Stressed Assets

Asset quality improved materially by FY26-end. Gross Stage 3 assets declined to 1.09 per cent and net Stage 3 assets to 0.15 per cent, while Stage 3 provision coverage was about 86 per cent.

PFC resolved the Sinnar Thermal exposure of about Rs30 billion, recovering about 42 per cent of outstanding principal. As the exposure already carried about 80 per cent provisioning, the resolution generated about Rs6.7 billion of provision write-backs in Q4 FY26. Resolution of TRN Energy, with exposure of about Rs11.3 billion, also generated provision reversals of about Rs1.3-1.6 billion during FY26.

Of 19 stressed projects, 16 projects totalling about Rs46.8 billion are fully provided. Asset-quality risks remain relevant, with 10 stressed projects worth about Rs54.7 billion still under the National Company Law Tribunal (NCLT), while nine projects worth about Rs8.5 billion are under resolution outside the NCLT.

Loan Growth, Spreads and Funding Costs

Management maintained its FY27 loan-growth guidance at about 10 per cent and guided for spreads of 2.4-2.5 per cent. FY26 yield moderated to 9.96 per cent from 10.02 per cent in FY25, while cost of funds increased to 7.50 per cent from 7.44 per cent. This resulted in a spread of 2.46 per cent and a net interest margin (NIM) of 3.55 per cent.

Competitive refinancing of operational renewable projects, lower lending rates, foreign-exchange volatility and lagged liability repricing remain pressure points. PFC stated that about 97 per cent of foreign borrowings are hedged and about 65 per cent of liabilities are fixed-rate. FY26 foreign-exchange translation losses were described as largely notional.

Earnings Outlook and Valuation

Despite the estimate cuts, Emkay expects PFC to deliver about 10 per cent loan growth and a 16-17 per cent return on equity.

Emkay raised its Mar-27 target price to Rs500 from Rs450. The target is based on a sum-of-the-parts valuation comprising Rs360 per share for standalone PFC and a valuation of PFC's 52.63 per cent stake in REC, using a Rs440 REC target price and a 25 per cent holding-company discount. The target implies about 1.0 times FY28E standalone price-to-book.

A proposed PFC-REC restructuring is targeted for completion by FY27-end, subject to regulatory and government approvals. The final structure remains under discussion.