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Shares of Power Finance Corporation (PFC) and REC Limited declined up to 3 per cent in intraday deals on Thursday, August 20, after Morgan Stanley downgraded the power sector financiers amid lower loan growth expectations.
REC share price declined 2.8 per cent to Rs 327.50 on the Stock Exchange (NSE). Meanwhile, PFC share price was down 2.5 per cent at Rs 365.05. However, the Nifty 50 index was positive, trading 0.70 per cent higher at 24,248 around 1.10 PM.
So far this year, the stock of PFC has been flat while REC has declined 10 per cent.
Why did Morgan Stanley downgrade PFC & REC?
For the first quarter of the financial year (Q1 FY27), PFC's loan growth moderated to 4 per cent and REC's to 1 per cent year-on-year (Y-o-Y). This was significantly lower than 16 per cent Y-o-Y loan growth posted by PFC in Q1 FY26 and a rise of 10 per cent by REC in the same period.
In contrast, the global brokerage highlighted that system non-food credit growth expanded to 18.3 per cent Y-o-Y in Q1 FY27 from 8.9 per cent in Q1 FY26, and bank credit to the power sector picked up to 23.8 per cent Y-o-Y from 7.7 per cent during the said period.
Morgan Stanley said it had already reduced its medium-term loan growth expectations to 8-9 per cent CAGR following softer H2FY26 trends, but even against these "lowered expectations, Q1 FY27 has disappointed".
Analysts at the brokerage further said that PFC and REC can defend market share by pricing more competitively, but this limits margin upside and ultimately NII growth. Alternatively, they can protect spreads, but risk further loan growth pressures.
"In either case, the path to a meaningful acceleration in NII is less straightforward than we previously assumed. Impaired asset ratios are already close to historical lows, so there is less scope for repeated recovery-led earnings upgrades either," said the brokerage.
As a result, it has cut the PFC's core EPS for FY28 by 5.5 per cent and for FY29 by 7 per cent. Similarly, for REC, it has lowered the core EPS for FY28 by 5 per cent and for FY29 by 7 per cent.
The brokerage further downgraded PFC and REC to equal weight from overweight and slashed targets by 20 per cent and 16 per cent, respectively to Rs 410 and Rs 360.
What could drive future outlook?
Morgan Stanley, however, could turn more constructive on the two power sector NBFCs upon visibility of a pickup in loan growth to at least low double digits, considering the much faster growth in overall system and bank credit to the power sector.
Conversely, further sustained loan growth weakness could make us more negative, it cautioned.
Disclaimer: Views and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers' discretion is advised.
