REC, PFC Shares: Love Them or Hate Them, But You Can’t Ignore Them, Says Bernstein

NSE

Brokerage firm Bernstein has started covering REC Ltd. and PFC Ltd., two power financing public sector units (PSUs), with an “outperform” rating. Bernstein considers these stocks as top picks in India’s power sector. They have set a price target of ₹653 for REC and ₹620 for PFC, suggesting a potential increase of 21% and 23% respectively from Tuesday’s closing prices.

Both REC and PFC saw a drop of over 20% on June 4, the day of the Lok Sabha Election results, and have not yet recovered from those losses. Interestingly, both stocks had reached record highs just a day earlier on June 3. In 2023, these stocks were the best performers on the Nifty PSE index, each gaining over 200%.

In their note, Bernstein mentioned that REC and PFC, which were overlooked by investors for more than a decade, now have market capitalizations between $15 billion and $20 billion and are seeing trading volumes of nearly $125 million. Despite this, both stocks are trading at 8 to 10 times their trailing price-to-earnings ratios.

Bernstein categorizes investors into three groups: those who love REC and PFC, those who question their existence, and those who have never heard of them. The firm believes that investors are underestimating the length and strength of the current power cycle. While 100 GW of generation capacity was added in the last six years, Bernstein expects over 300 GW to be added in the next six years.

The brokerage also anticipates that power demand will continue to exceed expectations. They believe that the risks of non-performing assets (NPAs) are much lower this cycle and that the reversal of provisions will continue in the current financial year.

In terms of valuation, both REC and PFC have a better Return on Equity (RoE) of over 20% compared to their peers in the power sector, yet they are still trading at lower prices. PFC shares are currently trading at a price-to-earnings multiple of 6.7 times for the financial year 2025, while REC trades at a multiple of 8.5 times.

Shares of both REC and PFC have dropped 10% in the last month and are still far from their record highs reached on June 3.