Power Finance Corporation sees near-term disbursement pressure but PFC-REC merger offers structural catalyst

Investment View and Key Takeaways

ICICI Direct Research retains its Buy rating on Power Finance Corporation Ltd. (PFC) and reduces its target price to Rs 500 from Rs 520. The broker sees near-term pressure from weak disbursements and competitive repricing, but believes PFC’s structural opportunity remains intact, supported by its strong position in power-sector financing, healthy asset quality and the proposed PFC-REC merger.

Business Profile and Loan Portfolio

PFC is a Maharatna PSU under the Ministry of Power and the largest power-sector-focused NBFC-IFC. It lends to generation, transmission and distribution, renewables, energy storage and, increasingly, infrastructure.

PFC’s loan-asset mix comprises generation at 48 per cent, transmission and distribution at 41 per cent, and infrastructure and other assets at 11 per cent. Renewable assets already account for 15 per cent of the loan book.

Q1FY27 Operating Performance

PFC reported muted operating performance in Q1FY27. Loan assets stood at Rs 5,70,045 crore, up 3.7 per cent year on year but down 1.7 per cent sequentially. Disbursements declined 44 per cent year on year and 50 per cent sequentially to Rs 20,176 crore, reflecting moderating loan demand, prepayments, elevated refinancing competition and lower RBPF-led rollover.

Net interest income declined 4.4 per cent year on year to Rs 5,234 crore amid competitive loan repricing and elevated foreign-exchange hedging costs. Spreads improved 3 basis points sequentially to 2.49 per cent but remained 12 basis points below the prior year, while NIM was 3.54 per cent, down 14 basis points year on year. Reported PAT increased 5.4 per cent year on year to Rs 4,745 crore, principally supported by impairment reversals and lower credit cost rather than core income growth.

Growth Outlook and PFC-REC Merger Catalyst

ICICI Direct views weak disbursement momentum as the main near-term constraint on AUM growth, but considers PFC’s structural opportunity intact. The broker highlights sanctions of Rs 2.85 lakh crore and an undisbursed pipeline of Rs 2.5-3 lakh crore across transmission, distribution and infrastructure.

The broker expects the PFC-REC merger to reduce competitive overlap, improve pricing discipline and support spread stability. A larger combined balance sheet could also strengthen funding bargaining power. The proposed combined entity would have an approximately Rs 12 lakh crore balance sheet and a group renewable book of approximately Rs 1.6 lakh crore.

The proposed share-swap ratio is 88:100, with an appointed date of April 1, 2027, subject to approvals. Management’s comments on operational and policy alignment provide the broker comfort on integration risk. Removal of the holding-company discount on PFC’s REC ownership could be a medium-term valuation catalyst.

Asset Quality and Credit Costs

Asset quality remains a supporting factor in the broker’s thesis. Gross and net NPAs were broadly stable at 1.11 per cent and 0.15 per cent, respectively. The Stage 3 book was Rs 6,315 crore with 86 per cent provisioning, and around 80 per cent of the peak stressed pool has been resolved.

The residual book includes 10 NCLT projects worth Rs 5,461 crore that carry 91 per cent provisioning. A Q1FY27 provision reversal followed an upward revision in TNPGCL’s internal rating. ICICI Direct cautions that provision write-backs are largely one-off, but expects the lower residual stress pool, government-linked exposure and strong provision coverage to support credit costs and earnings.

Broker Estimates and Valuation

The target price values PFC at approximately 1.15 times FY28E book value and applies a 30 per cent discount to the subsidiary.

Key Risks

• Moderation in loan growth and margins.
• Delay in the proposed PFC-REC merger.