REC, PFC Shares Rise After Morgan Stanley’s Overweight Rating

On Thursday, the REC shares and PFC shares surged by around 2 to 3 percent on NSE after global brokerage firm, Morgan Stanley initiated coverage of these two Indian power sector financiers, REC Limited (REC) and Power Finance Corporation (PFC), assigning both companies an ‘Overweight’ rating. This move comes after a period of underperformance for these stocks, which had previously enjoyed strong investor interest through 2023 and 2024 but have corrected significantly in the past year. Morgan Stanley’s analysis positions REC and PFC as compelling investment opportunities, citing their attractive valuations, robust growth prospects, and critical roles in India’s ongoing energy transformation.

The brokerage sets a price target of Rs. 485 for REC and Rs. 508 for PFC, implying potential upsides of around 23 percent and 21 percent, respectively, from recent closing levels. These targets reflect Morgan Stanley’s confidence in the companies’ ability to deliver consistent financial performance on the back of massive capex cycle in India’s power sector. The government’s ambitious plans which is amounting to Rs. 35 lakh crore in investments through 2032 while focusing on expanding generation capacity, modernizing transmission and distribution, and supporting infrastructure such as smart metering, energy storage, and EV charging. REC and PFC are expected to play pivotal roles as primary lenders to these projects.

Morgan Stanley expects that both REC and PFC to achieve a 12 percent CAGR in their loan portfolios between fiscal years 2025 and 2028. The brokerage expects these companies to deliver 17 percent to 19 percent range return of return on investment. This performance is anticipated to be self-sustaining, supported by steady dividend yields of 3.8 percent to 4.5 percent based on a 30 percent payout ratio. Notably, these firms for fiscal 2027 estimated price-to-earnings (P/E) ratios of 5 to 6 times suggesting that much of the risk is already priced in, making the risk-reward profile attractive at current levels.

Despite a sharp rally in non-banking financial company (NBFC) stocks year-to-date, both REC and PFC have corrected around 24 percent to 35 percent in the past 12 months, compared to the Nifty 50 delivering around 4.51 percent. Morgan Stanley highlights that this correction has created a compelling entry point for investors, especially as both stocks now offer similar risk-reward profiles and remain in the top quartile of the brokerage’s coverage universe in terms of potential upside.

A key catalyst for future outperformance, according to Morgan Stanley, will be the companies ability to deliver relative financial outperformance compared to other NBFC peers. The brokerage expects REC and PFC to maintain good asset quality with limited slippages and recovery gains from bad loans. Additionally, a broader rally in public sector undertakings (PSU) could provide further tailwinds. On the risk side, Morgan Stanley flags the possibility of slower loan growth which is potentially dropping to single digits, and increased competition from banks as more likely threats than declining asset quality.

Morgan Stanley’s report also highlights the strategic importance of REC and PFC in financing India’s energy transition. As the country pushes towards renewable energy, energy storage, and grid modernization, these companies are expected to benefit from a sustained demand for credit in the power sector.