Power Finance Corporation faces muted loan growth and NIM pressure despite stable asset quality

Investment View and Valuation

Motilal Oswal Financial Services Limited (MOFSL) reiterates its Buy rating on Power Finance Corporation (PFC) with a target price of Rs 500, compared with a CMP of Rs 420. The broker considers PFC's standalone valuation attractive and attributes additional value to its stake in REC, while acknowledging that underlying loan growth and margins are under pressure.

The Rs 500 target price is based on a March 2028 sum-of-the-parts valuation. PFC standalone is valued at 1x price-to-book, contributing Rs 354 per share, while PFC's stake in REC contributes Rs 146 per share after applying a 20 per cent holding-company discount.

The report was published by MOFSL on August 8, 2026, and covers PFC's 1QFY27 operating performance.

1QFY27 Financial Performance

PFC reported 1QFY27 profit after tax (PAT) of Rs 4,750 crore, up about 5 per cent year on year and approximately 5 per cent above MOFSL's estimate. However, the earnings beat was primarily driven by provision write-backs rather than core operating momentum.

The cost-to-income ratio increased by around 45 basis points sequentially to 4.5 per cent. The decline in net interest income and higher operating expenses indicate weaker core operating performance despite the reported PAT beat.

Provision Write-backs, Yields and Margins

Provision write-backs stood at Rs 560 crore in 1QFY27, compared with Rs 1,380 crore in 4QFY26 and Rs 680 crore a year earlier. This resulted in negative credit costs of 10 basis points. The write-back was mainly attributable to an upward revision in PFC's internal rating of Tamil Nadu Power Generation Corporation Ltd.

Reported loan yields were about 9.56 per cent, compared with 9.96 per cent in FY26, while the cost of borrowings was about 7.07 per cent versus 7.5 per cent in FY26. The spread was approximately 2.5 per cent, and calculated net interest margin contracted by around 22 basis points sequentially to about 3.7 per cent.

Loan Growth and Disbursement Trends

The loan book stood at Rs 5.7 trillion, rising 4 per cent year on year but declining about 2 per cent sequentially. Disbursements fell 44 per cent year on year to Rs 20,100 crore.

Loan growth was affected by elevated prepayments in a lower interest-rate environment and seasonally weaker first-quarter disbursements. Management indicated that disbursement momentum should improve in the second half of FY27, supporting stronger subsequent loan-book growth.

Infrastructure accounted for around 5 per cent of 1QFY27 disbursements. Renewables' share of the loan mix declined to 14.8 per cent from 15.5 per cent in the preceding quarter.

Asset Quality and Stressed Assets

Asset quality remained stable sequentially. Gross Stage 3 and net Stage 3 ratios were around 1.1 per cent and 0.15 per cent, respectively, while Stage 3 provision coverage ratio (PCR) stood at 86.2 per cent. PCR on standard assets declined by around 8 basis points sequentially to 78 basis points.

PFC had approximately 19 NPA-classified projects. Resolutions for around 10 projects were being pursued through the National Company Law Tribunal (NCLT), with the remaining nine being addressed outside NCLT. Shiga Energy Pvt Ltd, a 97 MW hydro project with Rs 522 crore outstanding, was a major stressed asset outside NCLT.

Management Commentary

• Lower lending yields reflected reduced rates on both existing and incremental loans.
• PFC will calibrate pricing to market conditions while balancing growth and spreads.
• Foreign-currency borrowings were USD 10.6 billion as of June 2026, comprising 63 per cent USD, 22 per cent JPY and 15 per cent EUR exposure.
• About 97 per cent of foreign-currency borrowings were hedged.
• Management does not expect a material impact from the transition to NBFC-Upper Layer status.

Estimates and Outlook

MOFSL reduced its FY27 and FY28 EPS estimates by about 2 per cent and 5 per cent, respectively. The revisions reflect weaker loan growth and NIM contraction, partly offset by lower credit costs.

Key Risks

• Weak disbursements and slower loan growth.
• Increased exposure to power projects without power purchase agreements (PPAs).
• Competitive pressure leading to margin compression.
• Slower offtake for renewable-energy projects.