ICICI Securities has maintained a “BUY” rating on Power Finance Corporation with a target price of Rs 520, implying an upside potential of nearly 17% from the current market price of Rs 446. The brokerage believes the state-owned power sector financier remains strategically positioned to benefit from India’s accelerating energy transition despite temporary moderation in loan growth and pressure on lending spreads. While Q4FY26 reflected weaker disbursement momentum and tighter margins due to refinancing competition and elevated forex-linked costs, the company’s improving asset quality, large sanctioned pipeline, and expected synergies from the proposed PFC-REC merger continue to strengthen long-term earnings visibility.

ICICI Securities Reaffirms Positive Outlook on Power Finance Corporation

India’s largest power-focused NBFC remains central to the country’s infrastructure and energy financing ecosystem. Established in 1986 under the Ministry of Power, Power Finance Corporation (PFC) has evolved into a dominant lender across generation, transmission, distribution, renewable energy, storage infrastructure, and logistics financing.

The institution currently maintains a diversified asset mix, with generation accounting for 48% of the loan portfolio, transmission and distribution contributing 41%, while infrastructure and other segments form the remaining 11%. The brokerage believes this diversified structure provides resilience despite fluctuations across individual power segments.

Q4FY26 Performance Reflects Margin Pressure but Strong Profitability

PFC delivered a mixed quarterly performance marked by slower loan growth but sharply higher profitability.

Assets under management expanded 6.8% year-on-year to Rs 5.8 lakh crore, although quarterly growth remained muted at 1.8%. The moderation was largely attributed to lower rollover activity in DISCOM loans, elevated project prepayments, and aggressive refinancing by banks amid declining interest rates.

Despite softer growth, standalone profit after tax surged 24% YoY to Rs 6,325 crore during Q4FY26, primarily driven by substantial provision reversals linked to asset recoveries and improving utility credit profiles. Net interest income, however, declined to Rs 5,523 crore as spreads narrowed under competitive lending conditions.

Renewable Energy Financing Emerging as a Structural Growth Engine

PFC’s growing exposure to renewable infrastructure continues to emerge as one of the strongest long-term catalysts for the business.

The company’s renewable energy financing exposure climbed to Rs 90,135 crore during FY26 and now constitutes nearly 32% of its generation portfolio. PFC has already supported nearly 66 GW of renewable energy capacity, representing roughly 24% of India’s installed non-fossil fuel base.

Management highlighted that approximately 40% of newly tendered renewable projects now include integrated storage solutions, while another 30% are hybrid renewable projects. This transition toward dispatchable clean energy is expected to create substantial financing demand in coming years.

The company has already sanctioned nearly Rs 16,000 crore toward battery and pumped storage projects, positioning itself early within India’s energy-transition financing cycle.

Massive Sanctioned Pipeline Supports Medium-Term Visibility

Even though FY26 disbursements weakened, future business visibility remains robust.

PFC reported sanctions worth Rs 2.85 lakh crore during FY26, while the undisbursed sanctioned pipeline currently stands between Rs 2.5 lakh crore and Rs 3 lakh crore. Management indicated that infrastructure and renewable projects typically involve longer execution cycles due to environmental approvals, land acquisition, and phased construction-linked drawdowns.

The brokerage believes this sizeable pipeline should support medium-term loan growth despite near-term moderation. Management has guided for approximately 10% loan growth in FY27, driven by renewables, storage-linked projects, nuclear expansion, thermal upgrades, and infrastructure financing opportunities.

PFC-REC Merger Could Transform Sector Financing Landscape

The proposed merger between PFC and REC is viewed as a major strategic development.

According to management, the combined entity would create a unified power-sector financing institution with a loan book exceeding Rs 11.6 lakh crore, net worth of Rs 1.73 lakh crore, and annual profitability exceeding Rs 33,000 crore.

ICICI Securities believes the merger could generate multiple structural advantages:

• Improved pricing discipline
• Reduced competitive overlap
• Enhanced bargaining power on liabilities
• Operational efficiencies
• Potential valuation re-rating

Importantly, management emphasized that both organizations already possess strong operational and policy alignment, which reduces integration risks significantly.

Asset Quality Improvement Strengthens Earnings Stability

PFC’s stressed asset pool has declined sharply, improving long-term earnings confidence.

Gross non-performing assets declined to 1.09%, while net NPAs fell further to 0.15%. Nearly 80% of the company’s peak stressed assets have already been resolved. Only 19 Stage-3 projects remain, with 16 already fully provided for.

The company successfully resolved major stressed accounts such as Sinnar Thermal Power and TRN Energy during FY26, resulting in nearly Rs 800 crore of provision reversals. Additionally, improving DISCOM financial health led to another Rs 1,000 crore of expected credit loss reversals.

Management clarified, however, that these reversals are largely one-time in nature and may not recur at similar scale in FY27. Even so, lower residual stress and strong provision coverage are expected to keep future credit costs manageable.

Margins Remain a Key Monitorable Factor

Competitive lending conditions continue to pressure profitability metrics.

PFC’s spreads narrowed to 2.46% during FY26 from 2.58% in FY25, while net interest margins declined to 3.55%. The compression was driven by aggressive pricing competition from banks and elevated hedging costs linked to forex volatility.

Management expects spreads to remain within the 2.4%–2.5% range in FY27. While lower domestic interest rates could support funding costs, competition in refinancing markets may continue to pressure yields on incremental lending.

Still, the company retains a strong capital profile, with a CRAR ratio of 23.44% and Tier-1 ratio of 21.93%, comfortably above regulatory requirements.

Valuation Outlook and Investor Strategy

ICICI Securities continues to value PFC at 1.2x FY28 estimated book value while applying a 30% holding company discount to subsidiaries.

The brokerage believes the stock remains attractively valued given:

• Strong dividend profile
• Improving asset quality
• Renewable financing tailwinds
• Potential merger-driven rerating
• Healthy return ratios

With India’s energy infrastructure expansion accelerating and renewable financing demand rising steadily, ICICI Securities believes PFC remains strategically positioned to deliver long-term shareholder value despite temporary growth moderation and margin pressures.

Target Price: Rs 520
Current Market Price: Rs 446
Recommendation: BUY
Potential Upside: 17%

Disclaimer: Investors should conduct their own due diligence and assess risk tolerance before making investment decisions in equity markets.