Archive · 21 Aug 2026
Morgan Stanley downgrades PFC, REC as power-credit growth bypasses lenders
Power Finance Corporation and REC lend money to companies in the power sector.
Their loans grew much more slowly this quarter than they did last year.
At the same time, banks increased their power-sector lending quickly.
Morgan Stanley says this means PFC and REC are not capturing as much of the new business as expected.
The brokerage lowered its earnings forecasts and share-price targets for both companies.
It also changed its view of both stocks from ‘Overweight’ to ‘Equal-weight’.
The companies still have strong asset quality and healthy returns.
However, trying to win more loans by charging lower prices could reduce their profit margins.
Morgan Stanley wants to see much faster loan growth before becoming more positive.
Morgan Stanley downgraded Power Finance Corporation and REC to ‘Equal-weight’ and cut both price targets.
PFC’s loan growth fell to 4% year over year in Q1FY27 from 16%, while REC’s declined to 1% from 10%.
Bank credit to the power sector accelerated to 23.8% year over year, up from 7.7% a year earlier.
The brokerage expects gradual loan-growth recovery, but warned that aggressive pricing could pressure margins and net interest income.
Strong asset quality and low valuations remain positives, while the proposed merger is not expected to provide an immediate growth catalyst.
- Who
- Power Finance Corporation, REC, and Morgan Stanley.
- What
- Morgan Stanley downgraded both state-owned power-sector lenders to ‘Equal-weight’, cut their price targets, and lowered earnings estimates.
- When
- The assessment followed the companies’ Q1FY27 results; the proposed merger is targeted for completion by April 1, 2027, subject to approvals.
- Where
- In India’s power-finance and banking sector.
- Why
- Loan growth at PFC and REC slowed sharply even as bank credit to the power sector and overall system credit accelerated.
- PFC price target
- Cut to Rs 410 from Rs 510; rating changed from ‘Overweight’ to ‘Equal-weight’.
- REC price target
- Cut to Rs 360 from Rs 430; rating changed from ‘Overweight’ to ‘Equal-weight’.
- Q1FY27 loan growth
- PFC grew 4% year over year and REC grew 1%, compared with 16% and 10%, respectively, a year earlier.
- Power-sector bank credit
- Rose 23.8% year over year in Q1FY27 from 7.7% a year earlier.
- Asset quality
- PFC’s gross NPA ratio was 1.11% and REC’s was 0.23% in Q1FY27.
- Proposed merger
- The announced share-exchange ratio is 88 PFC shares for every 100 REC shares.