Motilal Oswal Financial Services has issued a BUY recommendation on Power Finance Corporation (PFC), setting a target price of Rs 485—representing a 17% upside from current levels. The research highlights PFC’s recalibrated growth strategy amid India’s evolving power sector, with a focus on renewable energy, asset quality improvements, and undemanding valuations. Investors are advised to note the company’s robust fundamentals, sectoral tailwinds, and the strategic moderation in loan growth that positions PFC for sustainable long-term returns.

Summary of the Investment Thesis

Power Finance Corporation (PFC), a leading non-banking financial company (NBFC) in India’s power sector, is at a pivotal juncture. Motilal Oswal’s research underscores a prudent recalibration of growth guidance, reflecting the sector’s shift from coal to renewables and the waning impact of government support schemes. Despite near-term moderation, PFC’s asset quality is improving, and the company is poised for steady growth, supported by high-yielding loans and a favorable risk-reward profile. With a target price of Rs 485 and a BUY call, the report presents PFC as an attractive investment for those seeking exposure to India’s energy transformation and financial sector resilience.

Strategic Growth Recalibration: Sensible Caution Amid Sectoral Shifts

PFC has revised its loan growth guidance to a more conservative 10-11% for FY26, down from earlier higher projections. This adjustment is a direct response to rapid technological advancements in the power sector, especially the shift from coal-based generation to renewables, and the evolving landscape of government support schemes. The recalibration aims to balance growth with risk mitigation, ensuring the company’s balance sheet remains resilient as the sector undergoes structural transformation.

Renewable Energy and Battery Storage: The New Frontier

The transition from coal to solar photovoltaic (PV) and the integration of battery storage are fundamentally reshaping power-sector lending. Solar PV, which has gained widespread adoption since 2016, now constitutes the largest share of India’s >200GW non-fossil fuel capacity. However, the intermittent nature of solar energy necessitates robust storage solutions. Battery storage, preferred over pumped storage projects for its flexibility, is now mandated in all new renewable tenders, marking a paradigm shift in project financing and sectoral growth drivers.

Government Schemes: Waning Momentum, Uncertain Future

Major government initiatives—such as the Late Payment Surcharge (LPS), Liquidity Infusion Scheme (LIS), and Revamped Distribution Sector Scheme (RDSS)—have historically driven growth but are now nearing completion. With LPS and LIS concluded and RDSS set to sunset by March 2026, the momentum from scheme-led growth is expected to taper off. The absence of new formalized support packages introduces an element of uncertainty, though ongoing focus on DISCOMs and infrastructure upgrades continues to provide some support.

Asset Quality: Marked Improvement Through Stressed Asset Resolution

PFC’s asset quality has seen significant improvement, with Stage 3 assets declining from Rs 300-310 billion at their peak to approximately Rs 110 billion. This progress is attributed to the resolution of legacy thermal power projects and heightened interest from strategic acquirers. Key accounts such as TRN Energy, Shiga Energy, and Sinnar Thermal are in advanced stages of resolution, either through one-time settlements or the National Company Law Tribunal (NCLT) process. Importantly, PFC has fully provisioned for assets under liquidation, ensuring any recoveries represent pure upside.

Financial Performance and Valuations: Undemanding Multiples, Robust Returns

PFC is projected to deliver a 12% CAGR in assets under management (AUM) and 8% CAGR in profit after tax (PAT) over FY25-FY27, with return on assets (RoA) and return on equity (RoE) expected at 3% and 18% respectively by FY27. The stock trades at an attractive 0.9x FY27E standalone price-to-book value (P/BV), a notable discount to sector peers, despite comparable or superior profitability metrics. The sum-of-the-parts (SoTP) valuation yields a target price of Rs 485, factoring in a 1.1x multiple for PFC’s standalone business and Rs 193 per share for its stake in REC, post a 20% holding company discount.

Key Valuation Metrics

Broader Power Sector Dynamics: Mixed Drivers, Resilient Outlook

The current investment landscape is characterized by a mix of opportunities across renewables (with integrated storage), conventional generation, and distribution. The government’s plan to add 80GW of conventional capacity, primarily through NTPC and other lenders, offers medium-term financing opportunities. Transmission, however, remains less significant for PFC due to the strong balance sheet of Power Grid Corporation of India. Despite temporary demand weakness caused by unseasonal weather, long-term electricity demand growth is expected to remain robust at 6-7% annually.

Interest Rate Environment: Margins to Remain Stable Despite Rate Cuts

With an anticipated 100 basis point cut in the repo rate, PFC may experience minor margin compression, as assets reprice faster than liabilities. However, the company’s predominantly fixed-rate borrowings (70%) and annual loan book resets are expected to cushion the impact. Management has guided for spreads of 2.5% (down slightly from 2.6%), with net interest margins (NIMs) stabilizing around 3.6-3.7% over the next two years.

Investment Levels and Targets for Investors

Motilal Oswal recommends a BUY on PFC with a target price of Rs 485, implying a 17% upside from the current market price of Rs 413. The risk-reward profile is favorable, with potential upside from further stressed asset resolutions and continued sectoral transformation. Key levels for investors to watch include support around Rs 357 (52-week low) and resistance near the Rs 485 target. The report suggests accumulating the stock on dips for long-term gains, given the company’s sectoral positioning and improving fundamentals.

PFC—A Compelling Play on India’s Energy Transformation

PFC’s recalibrated growth strategy, improving asset quality, and attractive valuations make it a compelling investment for those seeking exposure to India’s power sector evolution. The company’s focus on high-yielding loans, prudent risk management, and readiness to capitalize on emerging opportunities in renewables and storage position it for sustained profitability. With a clear BUY call and a target price of Rs 485, PFC stands out as a robust pick in the NBFC space, offering investors both stability and growth potential.