Power Finance Corporation (PFC) withdrew its planned three-year bond issuance on Monday as bids came in at yields higher than the company had expected, while it accepted ₹2,500 crore through a 15-year bond at a cut-off coupon of 7.55%. According to Business Standard, the state-owned power sector lender had invited bids for ₹2,500 crore through both three-year and 15-year bonds. The company received bids worth ₹6,995 crore across 93 bids for the 15-year bond, with yields ranging from 7.34% to 7.60%. The highest number of bids was received at 7.53% where investors bid for ₹1,344 crore, followed by ₹1,219 crore at 7.54%. A dealer at a state-owned bank noted that "The withdrawal of the three-year issue indicates that the company was unwilling to accept the higher borrowing cost demanded by investors."
Morgan Stanley downgraded both Power Finance Corporation Ltd. (PFC) and REC Ltd. to 'equalweight' from their previous 'overweight' rating in a note released on Thursday, August 20. According to reports from CNBC TV18, The Economic Times, Business Standard, and The Financial Express, this marks the first downgrade for PFC, which had been a 'consensus buy' among all 15 analysts covering the stock. The brokerage cited sharp moderation in loan growth for both companies while noting that system and bank credit to the power sector has accelerated. The downgrades came with meaningful cuts to both estimates and targets, with Morgan Stanley describing the growth disconnect between the two companies as much greater than they had anticipated. PFC and REC have seen their loan growth moderate sharply even as credit growth by banks and across the power sector has accelerated, creating a widening gap that the brokerage could no longer ignore. The downgrade comes ahead of the proposed PFC-REC merger, with both stocks already under pressure.
Morgan Stanley significantly cut price targets for both companies, with REC's target reduced to ₹360 from ₹430 earlier, implying an upside potential of 8% from current levels. As reported by CNBC TV18, The Economic Times, Business Standard, and The Financial Express, PFC's target was cut to ₹410 from ₹510, indicating a 9.3% upside potential from Wednesday's closing levels. The reduction represents a nearly 20% cut in PFC's target price and around a 16% reduction for REC. The revised targets reflect the brokerage's concerns about the companies' growth trajectory and sector dynamics. On PFC, the target was cut by 20% with core EPS estimates trimmed by 5.5% for FY28 and 7.0% for FY29. For REC, the target was reduced by 16% with EPS estimates down 5.0% for FY28 and 7.0% for FY29. The brokerage also noted that the path to a meaningful acceleration in net interest income was not straightforward, adding another layer of concern about the companies' future earnings potential. Morgan Stanley said it had already reduced its medium-term loan growth expectations to 8-9% CAGR following softer H2FY26 trends, but even against these 'lowered expectations, Q1 FY27 has disappointed'. The stocks remain inexpensive relative to their return ratios, but the lending growth gap has become too wide to ignore.
According to Business Standard and The Financial Express, PFC's loan growth moderated to 4% year-on-year in Q1 FY27, significantly lower than the 16% Y-o-Y growth posted in Q1 FY26. Similarly, REC's loan growth slowed to 1% Y-o-Y in the same quarter, compared to a 10% rise by REC in the same period last year. This sharp moderation in loan growth has been a key factor in the downgrade decision, with the gap between their slowing books and the broader acceleration in power sector credit being described as much greater than expected. In contrast, the global brokerage highlighted that system non-food credit growth expanded to 18.3% Y-o-Y in Q1 FY27 from 8.9% in Q1 FY26, and bank credit to the power sector picked up to 23.8% Y-o-Y from 7.7% during the same period. PFC's Q1FY27 net interest income fell 4% YoY to ₹5,233.5 crore, while net profit rose 5% to ₹4,745.4 crore, helped in part by credit reversals. REC's net interest income increased 5% sequentially but fell 4% Y-o-Y to ₹5,438.3 crore, with net profit falling 7% Y-o-Y to ₹4,149.5 crore. Morgan Stanley said PFC and REC can defend market share by pricing more competitively, but this limits margin upside and ultimately NII growth. The biggest concern highlighted by Morgan Stanley is the widening gap between loan growth at PFC and REC and credit growth across India's power sector, with the recovery in lending momentum appearing slower and more gradual than previously expected.
Morgan Stanley has significantly revised its growth expectations for both companies, with PFC's loan growth forecast reduced to 4.5% in FY27, 6.2% in FY28, and 7.9% in FY29 compared to earlier assumptions of 7.5%, 8.8%, and 9.8% respectively. REC's loan growth forecast has been cut to a 6% CAGR for FY26-FY28 from the earlier 9%. The brokerage now expects PFC's net profit to fall 3% in FY27 before rising 2% in FY28 and 9% in FY29, with core EPS expected to decline 5% in FY27, remain broadly flat in F28, and grow 9% in FY29. REC's earnings estimates were reduced by 5% for FY28 and 7% for FY29. PFC's core ROE is expected to moderate from 20.6% in FY26 to 16.9% in FY27 and 14.3% by FY29, while REC is expected to continue generating mid-teens ROE supported by stable margins and relatively strong asset quality. Morgan Stanley expects PFC's core ROE to moderate from 20.6% in FY26 to 16.9% in FY27 and 14.3% by FY29, even with that moderation, returns remain strong by the standards of large lenders. With impaired asset ratios already close to historical lows, there is less room for another round of recovery-led earnings upgrades, meaning asset quality can protect the downside but cannot provide the same earnings lift it did in previous years.
As reported by CNBC TV18, The Economic Times, Business Standard, and The Financial Express, PFC and REC shares fell up to 3% on Thursday, with PFC shares settling 2.9% lower at ₹363.60 per share on the NSE and REC shares declining 2.4% to ₹328.90. The stocks extended their losses for the third consecutive trading session as investors reacted to Morgan Stanley's concerns. PFC shares were trading at ₹365.35 on the NSE at 12:45 pm on August 20, down 2.43% after opening at ₹374.45 and touching an intraday high of ₹375.10 before slipping to a low of ₹365.05. REC shares were down 2.8% during the same session. However, the muted share price reaction on the day can be misleading, as both stocks were down less than 1% on the day. PFC at ₹365.35 sits below its new ₹410 target and REC at ₹334 below its ₹360 target, so the brokerage is not calling for immediate downside but capping the upside it previously saw. PFC shares declined as much as 2.45% to ₹365.20 and REC shares fell as much as 2.6% to ₹328 on Thursday. So far this year, the stock of PFC has been flat while REC has declined 10%, reflecting the ongoing pressure on these power sector financiers. An 'equal-weight' rating with a target above the market price signals a stock the brokerage expects to track the sector rather than beat it, with the thesis being about a slower, longer grind rather than a sudden fall. The stocks remain inexpensive, but the market needs a reason to pay more for them, with Morgan Stanley not seeing that reason yet.
