The global brokerage has set a price target of Rs 485 for REC and Rs 508 for PFC, implying a potential upside of 23% and 21%, respectively, from their previous closing levels.
Shares of Power Finance Corporation (PFC) climbed as much as 3.1% to Rs 430.75 on the BSE, while REC shares jumped as much as 2.6% to Rs 401.65.
“PFC and REC should each achieve 12% F25-28e loan CAGRs and 17-19% average ROE,” Morgan Stanley said in a note titled India Financials | PFC and REC: Attractive entry point; initiate with OW.
Morgan Stanley said it expects both PFC and REC to deliver compound annual loan growth of 12% between FY25 and FY28, along with an average return on equity (ROE) of 17–19%.
“At a F27e P/E of 5-6x for self-sustaining low-mid teens loan growth and a 3.8-4.5% dividend yield, with asset quality likely to be stable, we find risk-reward compelling vs. our coverage,” the brokerage said.The rally in REC and PFC comes despite a broader correction in their share prices over the past year. While non-banking financial company (NBFC) stocks have broadly rallied year-to-date, shares of REC and PFC have declined between 24% and 35% in the past 12 months. In contrast, the benchmark Sensex has risen 4.7% during the same period.
Technical signals diverge
From a technical perspective, the two stocks are currently trading with contrasting momentum signals.
PFC shares are showing bullish undertones, trading above seven of their eight key simple moving averages (SMAs), including the 5-day to 150-day averages, and only below the 200-day SMA. The Relative Strength Index (RSI) stands at 52.6, suggesting the stock is neither overbought nor oversold, while the MACD at 1.6 remains above both the center and signal lines, indicating ongoing bullish momentum.
REC, on the other hand, remains under technical pressure. The stock is trading below five of its eight key SMAs, namely the 30-day, 50-day, 100-day, 150-day, and 200-day averages, though it is above the 5-day, 10-day, and 20-day SMAs. The RSI at 42.2 and MACD at -3.2, which is below both the center and signal lines, point to a bearish trend.
Valuation case
Morgan Stanley highlighted the companies’ ability to sustain operations while delivering strong shareholder returns. “PFC and REC should each achieve 12% F25-28e loan CAGRs and 17-19% average ROE,” the brokerage said. It also noted that both stocks offer current dividend yields in the range of 3.8-4.5%, based on a 30% payout ratio.
Despite recent underperformance, the brokerage sees this as an “attractive entry point,” underpinned by the combination of steady fundamentals and inexpensive valuations.
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