Motilal Oswal Financial Services

Content:

Power Financiers: The Power Play

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Page #4

Summary: The Power Play: Key

to India’s energy transition

Page #6

Page #9

Sizing the opportunity in the

power finance sector

Story in charts

Page #16

Page #23

Companies Covered

Overview of the power sector

Power Finance Corporation: Powering progress!

Summary

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Pg24

Story in charts

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Pg26

Investment proposition in PFC

............................................................................................

Pg27

Valuation and View

..............................................................................................................

Pg37

Key risks

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Pg38

ESG initiatives

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Pg39

Bull and Bear cases ...................................................................................................... Pg42

SWOT analysis

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Pg43

Management Team

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Pg44

Financials and valuations

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Pg45

REC: Charging ahead with renewable might

Summary

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Pg48

Story in charts

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Pg50

Valuation and View

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Pg63

Key risks

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Pg64

ESG initiatives ............................................................................................................. Pg65

Bull and Bear cases ...................................................................................................... Pg67

SWOT analysis

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Pg68

Management Team

..............................................................................................................

Pg69

Financials and valuations

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Pg70

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

October 2024

Thematic| Sector: NBFC

Power Financiers

The Power Play: Key to India’s energy transition

PFC and REC fueling the nation’s energy boom



Initiating coverage on PFC and REC

Cos.

PFC

REC

Mcap TP Upside

(INR

INR (%)

1,449 560

1,317 630



Total installed power capacity

exhibited a ~4% CAGR over FY18-FY24

Installed capacity (GW)

YoY Growth (%)



Per capita power consumption (kwh)

Per Capita consumption



Investment opportunity of INR42t and more:

An investment opportunity of

INR42t (INR34t in firm capex + INR8t in optionality) is set to unfold in the Indian

power sector over the next decade, with generation accounting for ~85% of this

capex. The triple tailwinds driving this investment are: 1) power demand

accelerating at a higher ~7% CAGR (~5% earlier), 2) the urgent need to upgrade/

replace aging power infrastructure as the electricity mix undergoes a shift (more

RE all-day), and 3) the transition to cleaner sources of energy considering India’s

ambitious target of achieving 500GW of renewable energy (RES) capacity by 2030.

Power demand growth accelerating at 7% CAGR (vs. 5% earlier):

With a robust

GDP growth outlook for India and the emergence of new demand drivers

(electric vehicles, data centers, electrification of energy demand), we believe

power consumption in India can compound at 7%+ over the next decade

(currently 8-9%).

India's power sector is undergoing a significant transition from a phase of

surplus to one of shortage.

This transition has been driven by a combination of

factors, including increased power demand, underinvestment in dispatchable

power sources (such as thermal and hydro), and the govt.'s focus on renewable

energy. Consequently, there is a renewed emphasis on expanding power

generation capacity, which in turn will drive loan book growth for lenders such

as Power Finance Corporation (PFC) and Rural Electrification Corporation (REC).

India is projected to add ~250GW of new power generation capacity over the

next five years, nearly three times the 86GW capacity added in the previous

five years.

This expansion will involve substantial investments in renewable

energy, along with essential supporting infrastructure such as thermal plants,

battery storage, and pumped storage systems.

The ability of PFC and REC, as state-owned NBFCs, to mobilize and manage

substantial amounts of capital renders them indispensable to India's energy

ambitions.

Under the National Infrastructure Pipeline (NIP), there is a total

capex opportunity of INR29t:

~INR18t under renewable generation, ~INR7t

under T&D, and the remaining under conventional generation. Besides power

projects, PFC and REC are also exploring financing opportunities in electric

vehicles and charging infrastructure, bio-refinery projects, ethanol blending,

solar panels, Flue Gas Desulfurization (FGD), smart metering, and city-gas

distribution (CGD) projects. Further, their expansion into financing infrastructure

& logistics projects is likely to serve as an additional driver of sustained, healthy

loan growth.

In previous cycles, the power sector was plagued by high levels of NPAs, mainly

in thermal projects. However, the current cycle is markedly different, since a

majority of loans extended by PFC and REC are now directed towards

government entities or private renewable energy companies, both of which

exhibit lower default risks.

The GNPA and NNPA ratios are at their multi-year

lows, as the power sector has witnessed the resolution of various stressed

assets over the past three years.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition



For PFC, we expect a loan book CAGR of ~15% and a PAT CAGR of ~12% over

FY24-FY27. This is for an RoA/RoE of 2.9%/19% and a dividend yield of ~4.2% in

FY27E. PFC (standalone) trades at 1.0x FY26E core P/ABV, and the risk rewards

are attractive.

We initiate coverage on PFC with a BUY rating and a TP of

INR560

(based on a target multiple of 1.2x Sep’26E P/ABV on the standalone

business and ~INR211/share for its stake in REC with a holdco discount of 20%).

For REC, we project a loan book CAGR of ~18% and a PAT CAGR of ~15% over

FY24-FY27. This is for an RoA/RoE of 2.6%/21% and a dividend yield of ~4.7% in

FY27E. REC trades at 1.4x FY26E P/ABV.

We initiate coverage on REC with a BUY

rating and a TP of INR630

(based on a target multiple of 1.6x Sep’26E P/ABV).

Asset quality at its best in nearly a decade



POWER FINANCE CORPORATION

Financials Snapshot (INR b)

Y/E March

FY25E FY26E FY27E

NII

178 202

231

PPP

198 224

255

PAT

165 182

205

EPS (INR)

49.9 55.0 62.1

EPS Gr. (%)

BV/Sh. (INR)

275 313

357

ABV/Sh. (INR)

231 270

313

RoAA (%)

3.1

3.0

2.9

RoAE (%)

19.4 18.7 18.5

Div Payout (%) 30.0 30.0 30.0

Valuations

P/E (x)

8.8

8.0

7.1

P/BV (x)

1.6

1.4

1.2

Core P/E (x)

5.4

4.9

4.4

Core P/BV (x)

1.1

1.0

0.8

Div. Yld (%)

3.4

3.8

4.2

DISCOMs have historically been the weak link in India's power sector, suffering

from poor financial health due to high debt levels, operational inefficiencies,

and political interference. Interestingly, not every asset in the power sector is

stressed, and various government schemes and reforms such as IPDS, UDAY,

and LPS have actually reduced AT&C losses, improved the average realizable

revenue - average cost of supply (ARR-ACS) gap, and reduced DISCOM’s legacy

dues outstanding towards power generation and transmission companies.

PFC and REC are perceived as financial intermediaries that can raise borrowings

at attractive interest rates for deployment in the power sector. While a part of

this is true, it is also important to note that PFC and REC play an advisory role in

various government initiatives in the power sector. These are also the nodal

implementing agencies for various government schemes and packages, and

both together have funded more than 40% of the power sector capex in the last

five years.

In the current power upcycle, many distressed power plants have been acquired

by larger players, resulting in the resolution of multiple stressed projects. This

trend is expected to continue, leading to further recoveries for lenders like PFC

and REC. As the power sector recovers, there is potential for provision reversals,

particularly in the case of loans to thermal power plants that are now generating

positive cash flows. State-guaranteed loans now constitute 81% and 89% of the

loan mix for PFC and REC (v/s 83% and 88% in FY19), respectively.

Diversification into infra and logistics to enable a strong sanction pipeline



Beyond power generation, India’s infrastructure sector, including roads,

airports, and logistics, is set for significant expansion. PFC and REC have

expanded their mandates to include infrastructure financing, opening new

avenues for growth. The diversification into infrastructure projects, particularly

those backed by government guarantees, will provide PFC and REC with lower-

risk, high-reward opportunities.

Disbursements in renewables and infrastructure projects are usually back-

ended, suggesting that a healthy sanction pipeline will translate into healthy

disbursement growth in the subsequent yields. We estimate a disbursement

CAGR of 11% and 23% for PFC and REC, respectively, over FY24-FY27. However,

we should remain wary of higher exposures to private infrastructure/logistics

projects and promoter funding to entities in this segment.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

REC

Financials Snapshot (INR b)

PFC & REC: Benefitting from the power sector’s capex revival

PFC and REC will both be beneficiaries of the revival in power sector capex. With

our detailed project-level analysis of stressed assets, we believe that we are

now in a phase of power upcycle, where we will see stressed asset resolutions

continue, leading to further asset quality improvement. We do not see risks of

incremental additions to the stress pool over the next two years, and this should

keep credit costs benign at <5bp over FY25E-FY26E.

For an RoA profile of 3.0%/2.6%, a RoE of ~19%/21%, and dividend yields of

~3.8%/4.1% in FY26E, we believe current valuations of 1.0x and 1.4x FY26E

P/ABV for PFC (standalone) and REC, respectively, are attractive. Moreover,

both PFC and REC’s stock prices have corrected by ~25% from their recent highs,

and now even provide a margin of safety in valuations.

While we have a BUY

rating on both PFC and REC, we prefer REC over PFC, because of its better

execution capability and a stronger RoE profile.

Key downside risks for both PFC and REC:

1) an increase in exposure to projects

without PPA or to private infrastructure projects, 2) the RBI’s stricter draft

provisioning norms on project financing, 3) compression in spreads/NIM from

high competitive intensity in renewable projects, and 4) deterioration in the

health of DISCOM and potential haircuts in interest income.



Y/E March

FY25E FY26E FY27E

NII

196 226 264

PPP

196 228 266

PAT

159 183 211

EPS (INR)

60.5 69.3 80.1

EPS Gr. (%)

BV/Shr (INR)

306 357 417



ABV/Shr (INR)

302 354 413

RoAA (%)

2.7

2.6

RoE (%)

21.3 20.9 20.7

Div. Payout (%) 29.8 29.6 29.3

Valuation

P/E (x)

8.3

7.2

6.2

P/BV (x)

1.6

1.4

1.2

Div. Yield (%)

3.6

4.1

4.7



Valuation matrix: Comparison of PFC and REC with other NBFCs

CMP

MCap

(INR)

(INR b)

PFC*

439

1,449

REC

500

1,317

Five-Star

790

231

LIC HF

607

334

PNB HF

934

243

Aavas

1,727

137

HomeFirst

1,239

110

CanFin

823

110

Repco

499

Cholamandalam

1,481

1,245

MMFS*

292

361

Shriram Finance

3,302

1,242

Indostar

284

Muthoot*

1,883

756

Manappuram

183

155

BAF

7,272

4,501

Poonawalla

380

295

ABCL

225

587

LTFH

168

420

PIEL

1,003

226

MAS Financial

275

IIFL Finance

436

185

CreditAccess

1,145

183

Fusion Micro

226

Spandana Sphoorty

541

Note: *standalone; Source: MOFSL, Company

Peers

RoA (%)

FY25E

FY26E

3.1

3.0

2.7

2.6

8.1

7.6

1.6

2.3

2.5

3.2

3.5

3.4

2.2

3.0

2.9

2.5

2.8

2.0

2.4

3.3

1.3

1.6

5.4

5.3

4.6

4.8

4.0

4.2

4.6

4.3

0.0

2.5

2.6

1.0

1.8

2.9

3.0

2.1

3.3

4.4

4.8

-0.1

4.5

0.7

3.8

RoE (%)

FY25E

FY26E

19.4

18.7

21.3

20.9

18.7

18.8

14.7

13.8

11.5

13.0

14.5

15.2

16.4

17.5

17.9

17.5

13.9

13.2

20.6

22.5

12.7

15.7

16.3

17.2

5.1

7.1

19.3

19.1

18.5

19.1

19.6

21.3

14.8

16.4

12.1

13.9

11.5

13.1

3.4

6.4

14.5

14.7

9.6

14.9

18.1

18.4

-0.6

17.5

2.5

13.0

P/E (x)

FY25E

FY26E

5.4

4.9

8.3

7.2

21.5

17.8

6.8

6.5

13.3

10.5

23.2

19.1

29.2

23.5

13.0

11.3

7.2

6.7

27.8

20.3

14.1

10.3

14.7

12.1

22.6

16.1

14.9

13.0

6.7

5.5

26.6

20.0

22.5

17.8

17.0

13.2

14.8

11.8

24.4

12.5

16.3

12.6

16.5

9.0

14.1

11.7

4.2

42.6

7.4

P/BV (x)

FY25E

FY26E

1.1

1.0

1.6

1.4

3.7

3.1

0.9

0.8

1.4

1.3

3.1

2.7

4.5

3.8

2.1

1.8

0.9

0.8

5.2

4.0

1.7

1.5

2.2

2.0

1.1

2.7

2.3

1.1

1.0

4.7

3.9

3.1

2.7

2.0

1.7

1.6

1.5

0.8

2.0

1.7

1.4

1.3

2.4

2.0

0.8

0.7

1.0

0.9

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

STORY IN CHARTS

Strong investment pipeline in renewable energy sources (RES) projects

Electricity generation (Renewable)

Total RES Projects

Projected investment (INR t)

450

RDSS scheme is aimed at:

Reducing the

AT&C losses to

pan-India levels

of 12-15%

Reducing the ACS-

ARR gap to zero

by 2024-25 by

improving the

operational

efficiencies and

financial

sustainability

Improving the

quality, reliability,

and affordability of

power supply to

consumers through

a financially

sustainable and

operationally

efficient

distribution sector

Strong investment pipeline in infrastructure projects

Infrastructure loans

Total Infrastructure Projects

Projected investment (INR t)

5,153

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

STORY IN CHARTS

History of Central govt’s debt relief measures for DISCOMs



Accelerated power development scheme:

Aimed at upgrading T&D network+ adding tamper-

proof meters outlay of USD121m.



State Electricity Board bailout:

Central govt. converted 50% of outstanding debt to govt.

bonds and 50% waived off; INR7b package.



Electricity Act, 2003:

Established CERC/SERCs



Accelerated Power Development Reforms package:

Aims to achieve 15% AT&C loss (50% at

the time) through grants and incentives to states.



Restructured accelerated power development reforms package:

Central govt. to provide loans to

states to improve T&D structure of high density load centers to reduce AT&C losses.



Financial restructuring package:

DISCOM loans restructured (USD19b outstanding to banks); 50%

as govt-backed bonds and 50% into long-term loans, with lenient repayment terms and waiver of

penal interests.



Ujwal DISCOM Assurance Yojana (UDAY):

States to take up 75% of DISCOM debt (USD52b at the

time) and remainder loan to have low interest rates



Revamped distribution sector scheme:

Outlay of USD37b aimed at reducing India's AT&C losses to

12-15% and ACS-ARR gap to 0 through results-linked financial assistance outlay.



Electricity (late payment surcharge and related matters) Rules:

Scheme was introduced to reduce

Genco receivables from DISCOMs. Late Payment Surge rules provided for an incremental surcharge

with every additional month of default.



Electricity (amendment) Rules:

Quarterly monitoring of subsidies being released by states as billed

by DISCOMs.

2001-2003

2008-2015

2021-2023

Power Finance Corporation : Investment Rationale

Asset quality

strength to sustain;

stressed asset

resolutions to

continue

Expect ~15% loan

CAGR over the next

three years

High earnings

predictability with

PAT CAGR of ~12%

over FY24-27E

Rural Electrification Corporation: Investment Rationale

Strong loan CAGR of

~18% likely over the

next three years

Spread compression from

high competitive

intensity can be mitigated

with benign credit costs

New stressed asset

formation will be

minimal in this power

upcycle; Asset quality

outlook healthy

Healthy earnings

trajectory with ~21%

RoE over FY25-27E

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

STORY IN CHARTS

Total installed power capacity exhibited a ~4% CAGR over

FY18-FY24

Installed capacity (GW)

7.2

6.2

YoY Growth (%)

Thermal is still the largest conventional power source in

India and fossil fuel contributes ~55% to the total installed

power capacity (in GW)

Thermal

Hydro

Nuclear

Solar

Wind

Other RE

5.3

3.5

3.9

3.3

4.5

4.1

5.8

22 7

223

28 7

227

231

235

236

237

243

327

FY17

344

FY18

356

FY19

370

FY20

382

FY21

399

FY22

416

FY23

442

446

FY18

FY19

FY20

FY21

FY22

FY23

FY24

FY24 Jun'24

Per capita power consumption (kwh)

Per Capita consumption

1,331

1,255

1,149

1,181

1,208

1,161

Peak power demand and met status (GWh)

Peak Demand

Peak Met

Surplus(+) / Deficits(-)

1,122

1,075

1,010

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

PFC: Stressed loans being resolved in NCLT and outside NCLT

with healthy provision covers (%)

Under NCLT

Outside NCLT

REC: Healthy provision coverage on both NCLT and non-

NCLT stressed exposures

Resolution Status

Under NCLT

Outside NCLT

Total Stage III

Resolution Status

Under NCLT

Outside NCLT

Total Stage III

PCR on Stage 3

Under NCLT

Outside NCLT

PCR on total Stage III

INR b

123

138

No. of projects

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Sizing the opportunity in the power finance sector

Power has ~23% share in the INR111t total capex under NIP over FY20-25

The power sector has always commanded a significant proportion of the overall

domestic infrastructure spending. Conventionally, a large part of the domestic

power financing was towards coal-based thermal projects. However, given the

country’s stated objectives to generate 500GW of non-fossil electricity capacity and

reduce emissions by 1b tons by 2030, we believe the capex in renewable energy will

continue to remain elevated over the next five years as well.

Exhibit 1: Sector wise breakup of capex of INR111t during

FY20-25

17%

12%

4% 3%

24%

Energy

Roads

Railways

Ports

Airports

Urban

Digital infra

Irrigation

Rural infra

Agri and food processing infra

Social infra

Industrial infra

Source: NIP

Exhibit 2: Power and renewable energy to command ~87%

share in the estimated capex on Energy during FY20-25

52%

Power

Renewable energy

35%

Atomic energy

Petroleum and natural gas

18%

Source: NIP

A large part of the opportunity in power financing lies in renewable energy

Until now, private investment has not found its way into thermal power because of

the overcapacity, low plant load factor (PLF) and the government’s clear focus on

renewable energy projects. Besides, the environmental norms have become stricter,

and given the constant scrutiny around ESG, investors remain wary of investing in

conventional thermal power plants.

Thermal power projects of

28K MW are under

construction by the central

and state sector entities.

Moreover, ~28K MW of thermal power projects is under construction (at different

stages) by the central and state sector entities. By end-Jun’24, investments worth

INR1.8t had already gone into these projects, and additional investments of INR1.2t

are likely over the next five years. Thermal power projects of 28K MW are under

construction by the central and state sector entities.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 3: Thermal capacity under construction as of Jun’24

Capacity Addition GW

Project Name

Centre

Barh STPP St-I

Buxar TPP

Lara STPP St-II

North Karanpura STPP

Patratu STPP

Singrauli STPP, St-III

Talcher TPP St- III

NLC Talabira TPP

Ghatampur TPP

Khurja SCTPP

State

Jawaharpur STPP

Obra-C STPP

Panki TPS Extn.

Ennore SCTPP

North Chennai TPP St-III

Udangudi STPP St-I

Bhusawal TPS

Sagardighi TPP St-III

Yadadri TPS

DCRTPP Extn.

Private

Mahan STPP, Ph- II

Total

FY25E FY26E FY27E FY28E FY29E FY30E

Cumulative

State

INR b

Total Cost incurred Additional

Implementing

project

till

investment

agency

cost

30 Jun 24

required

NTPC

SJVN

NTPC

PVUNL

NTPC

NLC

NUPPL

THDC

UPRVUNL

TANGEDCO

MAHAGENCO

WBPDCL

TSGENCO

HPGCL

Mahan

Energen

224

104

155

162

187

172

118

272

194

111

146

117

164

102

131

345

124

3,075

224

155

139

174

107

126

108

105

271

1,869

146

167

103

263

115

1,207

Source: CEA

0.66

1.32

0.66

0.8 1.6

0.8

1.6

0.66 0.66

1.98

1.32

0.66

1.32

0.8

1.32

0.66

3.2 0.8

0.8

0.7

1.3

1.6

0.7

2.4

1.6

1.3

2.4

2.0

1.3

0.7

1.3

0.8

1.3

0.7

4.0

0.8

1.6

Bihar

Chhattisgarh

Jharkhand

Madhya Pradesh

Odisha

Uttar Pradesh

Tamil Nadu

Maharashtra

West Bengal

Telangana

Haryana

Madhya Pradesh

FGD installation mandatory and can be a good opportunity

To curb sulfur-dioxide emissions, installation of FGD systems in existing and all new

thermal power plants has been made mandatory. Our discussions with industry

experts suggested that installation of FGD will entail a cost of INR5m per MW,

implying a total investment of ~INR1t if it were to be fully and mandatorily installed

across all thermal plants.

Exhibit 4: FGD installed capacity (MW)

Central

State

Private

Total (MW)

Feasibility Study

started

Feasiblity Study

Tender

Completed

specification made

NIT issued

Bid Awarded

FGD installed

Source: CEA; Note: Data as of Mar’23

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 5: Status of FGD installation (based on the no. of units)

222 210

168

135

Total (No.

of units)

19 23

Central

State

Private

16 13

NIT

issued

38 46

Bid Awarded

Feasibility Study

started

Feasiblity Study

Tender

Completed

specification made

FGD

installed

Source: CEA; Note: Data as of Mar’23

A process for in-principle approval to pass FGD costs on to the end-consumers

through tariff increases is already in place for plants that have long-term power

purchase contracts. To enable financing, a provisional tariff increase for each such

contract should be approved upfront by regulators rather than just in-principle

approvals.

Renewable power: Focus of the government and where the opportunity lies

Under the 2015 Paris agreement, India committed to reduce its greenhouse gas

emissions by 33-35% below the 2005 levels and to achieve 40% of installed electric

power capacity from non-fossil sources by 2030. Renewable Energy Sources (RES)

are sustainable even at lower power tariffs, and they are attractive means of

meeting India’s energy requirements.

Exhibit 6: Installed RES capacity (in GW)

% share of RE in total installed capacity

33%

30%

28%

25%

22% 24%

110

125

144

33%

148

10%

11%

10%

Exhibit 7:

Proportion of generation from renewable sources

% share of RE in Generation

13%

14%

18%

20%

FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 June'24

Source: CEA, Note: Data is up to Jun’24

FY17

102

FY18

127

FY19

138

FY20

147

FY21

155

FY22

204

FY23

226

FY24

Source: CEA; Note: Data is up to Mar’24

Currently, India is committed to reaching 500GW of renewable energy capacity by

2030. As of Jun’24, the total installed renewable energy capacity had reached

~148GW, which was predominantly solar and wind, along with a relatively lower

proportion of biomass and hydro. The next committed target is to achieve net zero

carbon by 2070.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 8: Strong investment pipeline in RES projects

Electricity generation

(Renewable)

NIP Projects

Non-NIP Projects

Stressed Projects

Total RES Projects

No. of

projects

271

135

450

Source: NIP, MOFSL

Exhibit 9: Estimated investment of ~USD215b in RES projects

Electricity generation

(Renewable)

NIP Projects

Non-NIP Projects

Total RES Projects

Projected

investment (USD b)

187.8

26.8

214.6

Projected

investment (INR t)

15.8

2.2

18.0

Source: NIP, MOFSL

The NIP forecasts

investment opportunities of

~INR18t in the renewable

generation segment.

The NIP projects investment opportunities of ~INR18t in the renewable generation

segment. Most of the large-ticket projects in RES generation are under NIP.

Rajasthan, Uttar Pradesh, Gujarat, Madhya Pradesh, and Himachal Pradesh are the

top five states where there are opportunities in the RES generation segment. These

states contribute ~82% of the total number of such projects in the country as of

Mar’24.

The NIP also identifies a list of 44 renewable energy projects that are stressed. Most

of the stressed projects in this sub-sector are in the state of Telangana (contributing

~40% of the total number of stressed renewable energy projects as of Mar’24).

Transmission needs to scale up significantly to support the generation/load

Transmission capacity depends on the growth in loan and the addition of installed

generation capacity. Transmission infrastructure in India largely has participation

from the central/state entities and very little (or insignificant) presence of the

private sector.

Exhibit 10: Installed capacity of transmission lines in each of the five-year plans (all figures

in circuit km; CKM)

Installed capacityin cKM (220kV)

1,35,980

1,14,629

96,993

79,600

46,005

59,631

1,63,268

6th plan

7th plan

8th plan

9th plan

10th plan

11th plan

12th plan

Source: Ministry of Power

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 11: Total transmission lines (220KV and above in

CKM)

Transmission lines (in ckm)

4,71,341

4,41,821

4,13,407

4,25,071

4,56,716

4,85,544

Exhibit 12: Total transformation capacity (220KV and above

in MVA)

Transmission lines (in mva)

11,80,352

8,99,663

9,67,893

10,25,468

11,04,450

12,51,080

FY19

FY20

FY21

FY22

FY23

FY24

FY19

FY20

FY21

FY22

FY23

FY24

Source: National Power Portal and Ministry of power

The NIP forecasts an

investment of ~INR5.2t in

electricity transmission

spread across 217 NIP and

79 non-NIP projects.

Transmission capacity would need to grow to support the generation from the RES

of electricity. The NIP forecasts an investment of ~INR5.2t in electricity transmission

spread across 217 NIP and 79 non-NIP projects.

Typically, Pan-India, there are no

stressed assets as of Mar’24 in the transmission segment vs. 58 and 78 such

stressed projects in the distribution and generation segments, respectively.

The

NIP forecasts an investment of ~INR5.2t in electricity transmission spread across 217

NIP and 79 non-NIP projects.

Moreover, to fulfill the government’s vision to deliver 500GW of RES by 2030,

transmission capex would need to be carried out to support this additional load.

Distribution improving through multiple reforms

Distribution is often perceived (and perhaps also is) as the weakest link in the power

value chain. The government had in the past introduced various schemes, such as

the Integrated Power Development Scheme (IPDS) and Deen Dayal Upadhyaya Gram

Jyoti Yojana (DDUGJY), to strengthen the urban and rural distribution networks.

Due to the pandemic and the consequent lockdown, liquidity problems traversed

upstream in the power sector value chain due to the inability of DISCOMs to pay

generation and transmission companies for the electricity purchased and

transmitted. To tide over the liquidity crisis in the power sector, the GoI announced

the Liquidity Infusion Scheme (LIS) in May’20 to help DISCOMs pay outstanding dues

to CPSU GENCOs and TRANSCOs, Renewable Generators, and Independent Power

Producers. Under the scheme, REC and PFC provided long-term concessional

transition financing to the distribution utilities against an unconditional and

irrevocable state government guarantee. The sanctioned loan under the scheme

was disbursed in two tranches (50% each).

As of Dec’23, the total loan disbursed by

PFC and REC together under the Scheme stood at INR1.12t for 16 states.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

In CY21, the Central

government approved an

RDSS scheme with an outlay

of ~INR3t and estimated

budgetary support from the

central government worth

~INR976b over a period of

five years.

NIP anticipates investments of ~INR5.1t in the distribution segment

In CY21, the central government approved a Revamped Distribution Sector Scheme

(RDSS) – a reforms-based and results-linked scheme with an outlay of ~INR3t and

estimated budgetary support from the central government worth ~INR976b over a

period of five years (from FY22 to FY26). The scheme’s objective is to improve the

quality, reliability, and affordability of power supply to consumers through a

financially sustainable and operationally efficient distribution sector. In CY21, the

Central government approved an RDS scheme with an outlay of ~INR3t and

estimated budgetary support from the central government worth ~INR976b over a

period of five years.

The scheme aimed at:



reducing the AT&C losses to Pan-India levels of 12-15% and

reducing the ACS-ARR gap to zero by 2024-25 by improving the operational

efficiencies and financial sustainability

Improving the quality, reliability, and affordability of power supply to consumers

through a financially sustainable and operationally efficient distribution sector.

Key interventions under the plan included:



Providing support to DISCOMs to undertake activities for ensuring 100% system

metering, implementing prepaid smart metering, energy accounting, and

implementing infrastructure works for loss reduction, as well as for

modernization and system augmentation aimed at improving the quality and

reliability of power supply.

Segregating feeders dedicated only for supply of power for agricultural

purposes, which are proposed to be solarized under the KUSUM scheme, will be

sanctioned on priority under the scheme.

Along with their proposals, DISCOMs will also need to submit an action plan for

strengthening their distribution system and improving performance by way of

various reform measures. The action plan should contain targeted

improvements in operational efficiency, financial viability, as well as the quality

and reliability of power supply.

The unique feature of the scheme is that its implementation is based on the

action plan worked out for each state to address state-specific issues, rather

than a “one-size-fits-all” approach.



Progress made under RDSS:



Because of the reform measures taken under the scheme, AT&C losses have

come down to ~15.4% (provisional) in FY23. The direct impact of this will be on

reducing the ACS-ARR gap, which will ultimately benefit end consumers for

getting quality supply.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Statutory mechanism for timely payment to Generating companies



DISCOMs’ legacy dues

amounting to

~INR883b have been paid

by 13 States/UTs as of

Nov’23. The remaining

legacy dues as of Dec’23

stood at INR516.7b.



Electricity (late payment surcharge and related matters) Rules, 2022

provide

relief to the DISCOMs as well as electricity consumers, and at the same time,

generation companies are also getting the benefit of assured monthly

payments, which will help the whole power sector to become financially viable.

Provision has been made for a one-time scheme for liquidation of arrears,

enabling DISCOMs to pay total outstanding dues including Late Payment

Surcharge (LPS), as on the date of notification, in up to 48 monthly instalments.

No LPS on past outstanding dues will be applicable in case of timely payment of

these instalments. It will bring discipline in timely payment of dues.

All current dues are being paid since August 2022 within a maximum timeframe

of 75 days.

DISCOMs’ legacy dues, amounting to ~INR883b, have been paid by 13 States/

UTs as of Nov’23 (against total outstanding of ~INR1.4t as of Jun’22). The

balance legacy dues stood at INR516.7b as of Dec’23.

Based on the results achieved so far, it is expected that strict implementation of

the LPS Rules will bring back the financial viability of the power sector in the

country and would attract investments in the power sector. This rule has not

only ensured that the outstanding dues have been liquidated, but it has also

guaranteed that the current dues have been paid in time. It has played a vital

role towards ensuring the financial discipline in DISCOMs.

A total of 13 states opted for loans from PFC/REC (total loans sanctioned

under LPS stood at INR1.14t as of Dec’23).

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Overview of the power sector

India's power demand has been recording an impressive 6% CAGR from FY18 to

FY24, with projections indicating a continuation of this trend as the economy

expands. However, power generation capacity has lagged behind at 4% CAGR,

leading to a scenario where demand could outstrip supply, particularly as the

country adds more renewable energy capacity with lower plant load factors (PLFs)

vs. thermal power.

Exhibit 13: Total installed power capacity exhibited a ~4% CAGR over FY18-FY24

7.2%

Installed capacity (GW)

5.3%

3.5%

3.9%

3.3%

YoY Growth (%)

6.2%

4.5%

4.1%

5.8%

Thermal is still the largest

conventional power source

in India, and fossil fuel

contributes ~55% to the

total installed power

capacity.

327

FY17

344

FY18

356

FY19

370

FY20

382

FY21

399

FY22

416

FY23

442

FY24

446

Jun'24

Source: CEA

The gap between growing demand and lagging capacity presents a significant

opportunity for PFC and REC to finance new power generation projects, particularly

in renewables, thereby ensuring stable and profitable loan growth.

Exhibit 14: Thermal is still the largest conventional power source in India and fossil fuel

contributes ~55% to the total installed power capacity (In GW)

Thermal

344

223

357

227

Hydro

370

231

Nuclear

382

235

Solar

Wind

399

236

Other RE

416

237

442

243

FY18

FY19

FY20

FY21

FY22

FY23

FY24

Source: CEA

As of now, India’s per capita consumption of electricity is approximately one-third of

the world average, and per capita emission of carbon dioxide is also one-third of the

world average. In India’s pursuit to become a developed country, its per capita

consumption of electricity will definitely increase. Even if it were to cross the world

average over the next two decades, it will entail a three-fold increase in the per

capita consumption of electricity. Both PFC and REC will play a crucial role in

financing the capex towards electricity generation to cater to those levels of

electricity demand.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 15: Per capita power consumption (kwh)

Per Capita consumption

India’s per capita

consumption of electricity is

approximately one-third of

the world average.

1010

1331

1181

1208

1255

1161

1075

1122

1149

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Source: CEA

India has seen a steady and robust increase in power demand driven by intense

weather conditions in certain geographies, the emergence of new power use-cases

such as data centers, and an intensified focus on manufacturing.

Until 2013, India’s peak electricity demand used to be significantly higher than the

peak met, resulting in a power deficit ranging between 9% and 13% over FY10-13.

However, a surge in thermal capacity addition post-2012 allowed India to achieve

sufficient power supply after 2014. What followed was the power deficit declining

from ~5% in FY14 declining to <1% by FY20-FY21. This was driven by a surge in

thermal capacity addition post-2012, which allowed the country to achieve

sufficient power supply. This led to many thermal plants becoming distressed,

lacking power purchase agreements and coal supply, ultimately halting new thermal

capacity additions and shifting the focus to renewable energy.

Since FY23, however, India has again faced power shortages due to a combination of

the lack of new dispatchable power supply (excluding renewables) and strong

growth in power demand.

Exhibit 16: Peak power demand and met status (GWh)

Peak Demand

Peak Met

-1.6% -2.0%

Surplus(+) / Deficits(-)

-0.8% -0.7% -0.4% -1.2%

-4.0%

-1.4%

-3.2%

-4.5% -4.7%

-9.8%

-12.7%

-10.6%

-9.0%

Source: CEA

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

High AT&C losses + inadequate tariffs: Poor financial health of DISCOMs

Exhibit 17: DISCOM losses mounted again in FY23 after declining in FY22

Discom losses (INR b)

779

611

323

672

381

138

FY18

FY19

FY20

FY21

FY22

FY23

Source: PFC (Report on performance of power utilities); Note: Losses are after tax with subsidy

received

Exhibit 18: Collection and billing efficiency consistently improving

AT&C Losses (In %)

93.7

94.2

82.6

22.2

Billing Efficiency RHS (%)

92.8

83.4

22.6

92.2

84.9

21.7

92.8

84.2

21.9

Collection Efficiency (%)

97.3

87.0

81.6

23.6

86.1

16.2

15.4

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Source: PFC (Report on performance of power utilities); Note: Data is up to 31 Mar 23

Various reports on the domestic power sector from the credit rating agencies

suggested that the DISCOM losses in FY21/FY22 could have increased up to

INR900b/INR750b due to the adverse impact on the industrial segments in the first

Covid lockdown in the early months of FY21.

DISCOM losses, excluding

revenue grant under UDAY

and regulatory income,

were equal to ~INR672b in

FY23.

DISCOM losses, excluding revenue grant under UDAY and regulatory income, were

equal to ~INR672b in FY23. Tamil Nadu, Telangana, Jharkhand, Maharashtra, Uttar

Pradesh, and Karnataka were among the most distressed state distribution utilities,

with a combined contribution of ~92% to the DISCOM losses (excluding revenue

grant under UDAY and regulatory income) in FY23.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 19: Share of respective state DISCOMs in the cumulative losses of DISCOMs

14%

Tamil Nadu

Telangana

Maharashtra

23%

17%

Jharkhand

karnataka

30%

Others

Source: PFC (Report on performance of power utilities) as of 31 Mar’23

Note: Losses are excluding revenue grant under UDAY and regulatory income

Exhibit 20: Outstanding borrowing of DISCOMs (INR b)

Outstanding borrowing of discoms (INR b)

Exhibit 21: DISCOMs’ borrowing distribution

23%

37%

Tamil Nadu

Telangana

Maharashtra

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: PFC (report on performance of power utilities) as of Mar’23

11%

Others

Source: PFC (report on performance of power utilities) as of Mar’23

Power sector reforms in India for the distribution segment

Some of the key recommendations made by the government or its agencies

in the recent past included the following:



Regular tariff revisions to fairly reflect the fixed and variable costs.

Distribution franchise model where the private sector entities have no

ownership over the distribution of grid assets but primarily manage the

collections and the billing instead

Distribution licensee model where the private sector entities are even owners of

the distribution assets

Smart metering that can help DISCOMs improve their billing efficiency. RDSS can

be effectively leveraged to achieve full coverage using prepaid/smart meters.

DISCOMs should be dissuaded from signing newer, more expensive long-term

PPAs with thermal gencos, provided the markets can offer lower-cost power to

the DISCOMs.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 22: Reforms introduced by the govt. to reduce ACS-ARR GAP to Zero by FY25 (in

INR/kWh)

ARR (Subsidy received)

0.7

ACS

Gap

0.6

0.5

0.7

0.6

0.5

4.8 5.4

FY16

4.9 5.5

FY17

5.0 5.5

FY18

5.3 6.0

FY19

5.6 6.2

FY20

5.6 6.2

FY21

0.1

6.2 6.3

FY22

6.7 7.1

FY23

Source: PFC (Report on performance of power utilities) as of Mar’23

RDSS scheme is aimed at:



reducing the AT&C losses to pan-India levels of 12-15% and

reducing the ACS-ARR gap to zero by 2024-25 by improving the operational

efficiencies and financial sustainability.

Exhibit 23: Debt service coverage ratio for states

Debt Service Coverage ratio

FY21

FY23

PFC (Report on performance of power utilities):



Debt servicing capabilities of state DISCOMs have seen a major improvement as

compared to DSCR in 2021 (barring a few DISCOMs in Uttarakhand, Andhra

Pradesh, and Chhattisgarh).

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 24: History of Central govt’s debt relief measures for DISCOMs



Accelerated power development scheme:

Aimed at upgrading T&D network+ adding tamper-

2001-2003

2008-2015

2021-2023

proof meters outlay of USD121m.



State Electricity Board bailout:

Central govt. converted 50% of outstanding debt to govt.

bonds and 50% waived off; INR7b package.



Electricity Act, 2003:

Established CERC/SERCs



Accelerated Power Development Reforms package:

Aims to achieve 15% AT&C loss (50% at

the time) through grants and incentives to states.



Restructured accelerated power development reforms package:

Central govt. to provide loans to

states to improve T&D structure of high density load centers to reduce AT&C losses.



Financial restructuring package:

DISCOM loans restructured (USD19b outstanding to banks); 50%

as govt-backed bonds and 50% into long-term loans, with lenient repayment terms and waiver of

penal interests.



Ujwal DISCOM Assurance Yojana (UDAY):

States to take up 75% of DISCOM debt (USD52b at the

time) and remainder loan to have low interest rates



Revamped distribution sector scheme:

Outlay of USD37b aimed at reducing India's AT&C losses to

12-15% and ACS-ARR gap to 0 through results-linked financial assistance outlay.



Electricity (late payment surcharge and related matters) Rules:

Scheme was introduced to reduce

Genco receivables from DISCOMs. Late Payment Surge rules provided for an incremental surcharge

with every additional month of default.



Electricity (Amendment) Rules:

Quarterly monitoring of subsidies being released by states as billed

by DISCOMs

The NDA government has a strong focus on infrastructure, and with PFC/REC both

mandated to finance both infrastructure/logistics projects, we will see a healthy

sanction pipeline (presently) translating into stronger disbursements in the coming

years. The loan sanction data published by REC suggests that the surge in loan

sanctions has been aided by a combination of both renewables as well as

infrastructure/logistics.

It is important to note that only those renewable plants that get commissioned

before Jul’25 will be eligible for free inter-state transmission. This could result in a

significant increase in renewable capacity additions in FY25 and translate into

stronger disbursements (from existing pipelines) in FY25 and early FY26.

Exhibit 25: Strong investment pipeline in infrastructure

projects

Infrastructure loans

NIP Projects

Non-NIP Projects

Total RES Projects

No. of projects

4,188

965

5,153

Source: NIP, MOFSL

Exhibit 26: Estimates investment of ~USD600b in

infrastructure projects

Infrastructure loans

NIP Projects

Non-NIP Projects

Total RES Projects

Projected

investment (USD b)

542.9

39.8

582.6

Projected

investment (INR t)

45.5

3.3

48.9

Source: NIP, MOFSL

Wholesale loans and infrastructure financing by NBFCs have been looked

upon with much skepticism, particularly after the default of IL&FS

In FY24, REC sanctioned ~INR406b to non-power infrastructure sectors comprising

roads & expressways, metro rail, airports, IT communication, social and commercial

infrastructure (educational institution, hospitals), ports, and electro-mechanical

(E&M) works in respect of various other sectors such as steel, refinery, etc.

Infrastructure financing in India has evolved significantly over recent years. The

previous reliance on public-private partnerships (PPP) led to failures due to

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

developers/generators facing risks like traffic in road projects and revenue in power

plants. Now, the government has shifted to models such as Hybrid Annuity Model

(HAM) and Engineering, Procurement, and Construction (EPC), which reduce these

risks. While this new approach is less risky, it is still a new area for PFC and REC,

which have their core expertise in power sector financing. Their focus on

government-backed infrastructure projects is prudent, but a shift towards significant

lending to private infrastructure projects could pose risks and could be again met

with skepticism from much of the investor fraternity.

Exhibit 27: REC infra and logistics loan sanctions for FY23

Ports

Shipping,

waterways

Drinking water

12%

Highways

20%

Communicaton

FY23- Infra loans sanctions

Private

Airport

Sector Refinery

Hospitals

Education

Institutions

Others

Metro

Hospitals

11%

Drinking

water/

irrigation

12%

Source: Company, MOFSL

Exhibit 28: REC infra and logistics loans sanctions for FY24

FY24- Infra loans sanction

Private

24%

Highways/R

oads

38%

Metro

42%

ource: Company, MOFSL

The majority of the infra

and logistics loans

sanctioned by REC are to

govt./ state projects, which

account for ~75% (FY23:

~96%) of the total infra and

logistics loans.

During FY24, REC sanctioned 38 infrastructure & logistics projects involving a total

loan amount of ~INR406b in several large-scale infrastructure projects in areas such

as development of highways/roads, metro rail systems, airports, hospitals, etc. The

majority of the infra and logistics loans sanctioned by REC are to govt./ state

projects, which account for ~75% (FY23: ~96%) of the total infra and logistics loans.

However, increasing share of private loans can expose the loan book of power

financiers to higher risk and ultimately elevated credit costs in the future.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

COMPANIES COVERED

Power Finance Corporation: Powering progress!

Summary

...............................................................................................................................

Pg24

Story in charts

.......................................................................................................................

Pg26

Investment proposition in PFC

.............................................................................................

Pg27

Valuation and View

..............................................................................................................

Pg37

Key risks

................................................................................................................................

Pg38

ESG initiatives

.......................................................................................................................

Pg39

Bull and Bear cases ...................................................................................................... Pg42

SWOT analysis....................................................................................................................... Pg43

Management Team

..............................................................................................................

Pg44

Financials and valuations

.....................................................................................................

Pg45

REC: Charging ahead with renewable might

Summary

...............................................................................................................................

Pg48

Story in charts

.......................................................................................................................

Pg50

Valuation and View

..............................................................................................................

Pg63

Key risks

................................................................................................................................

Pg64

ESG initiatives ............................................................................................................. Pg65

Bull and Bear cases ...................................................................................................... Pg67

SWOT analysis....................................................................................................................... Pg68

Management Team

..............................................................................................................

Pg69

Financials and valuations

.....................................................................................................

Pg70

October 2024

Power Financiers - Thematic: The Power

Initiating

to India’s energy transition

Play: Key

Coverage | Sector: NBFC

7 October 2024

Power Finance Corporation

BSE SENSEX

81,050

S&P CNX

24,796

CMP: INR439

TP: INR560 (+28%)

Buy

Powering progress!

Stressed asset resolutions will aid write-backs and keep credit costs benign

Stock Info

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

12M Avg Val (INR M)

Free float (%)

POWF IN

3300

1447.6 / 17.2

580 / 226

-19/-5/52

7255

44.0

PFC is one of India’s two major public sector pure-play power asset finance companies.

With a presence across the value chain, PFC has a significant exposure to power

generation (~48% of loans as of Jun’24, including ~13% in renewable energy or RE) and

only ~19% of its loans are offered to private players. Given its strong focus on

RE/infrastructure lending and intense competition from banks in this segment, PFC’s

spreads are likely to contract by ~20bp over the next two years. Our detailed project-

level analysis suggests that asset quality will continue to improve from hereon, aided by

stressed asset resolutions (particularly in thermal generation) and lower credit costs

(including write-backs from recoveries) of <5bp over the next three years.

Financials Snapshot (INR b)

Y/E March

FY25E FY26E

NII

178

202

PPP

198

224

PAT

165

182

EPS (INR)

49.9 55.0

EPS Gr. (%)

BV/Sh. (INR)

275

313

ABV/Sh. (INR)

231

270

RoAA (%)

3.1

3.0

RoAE (%)

19.4 18.7

Div Payout (%)

30.0 30.0

Valuations

P/E (x)

8.8

8.0

P/BV (x)

1.6

1.4

Core P/E (x)

5.4

4.9

Core P/BV (x)

1.1

1.0

Div. Yld (%)

3.4

3.8

FY27E

231

255

205

62.1

357

313

2.9

18.5

30.0

7.1

1.2

4.4

0.8

4.2

Asset quality risks have receded; stressed asset resolutions to continue

We tried to reconstitute PFC’s stressed project portfolio and believe that PFC has

demonstrated significant progress on stressed asset resolutions and is already at

advanced stages of resolutions in projects with total exposure of ~INR40b. Most of

the stressed projects are adequately provided for and recoveries in many projects

will flow directly into the income statement. Based on our analysis, we estimate

recoveries of ~INR15-20b over the next 12-18 months.

Expect ~15% loan CAGR over the next three years



PFC and REC will always remain the implementing agencies for all incentives

and schemes rolled out by the government of India (GoI) to influence every

power sector reform. PFC clocked a ~24% CAGR in loan book over FY10-FY15,

driven by strong capex in the thermal power segment. However, loan book

growth slowed to a 7% CAGR during FY15-FY22 because of stress in thermal

generation projects and the focus shifting toward RE projects and T&D.



FY24 disbursements were dominated by DISCOM disbursements. Over the

next five years, we anticipate a significant acceleration in generation capex,

driven by investments in conventional generation and energy transition in

India, which is aiding RE projects. A strong sanction pipeline in infrastructure

will also lead to stronger disbursements in such infrastructure projects in the

coming years. We expect a ~15% CAGR in loans for PFC over FY24-FY27.

Intense competition and declining interest rate cycle to weigh on margins

PFC delivered historical high spreads of 3.3% in FY22, which declined to 3.1%/2.8%

in FY23/FY24. Historically, the spreads for PFC have been around 250-300bp.

Spreads could compress further due to a) banks remaining aggressive and

amenable to financing good-quality operational power projects, b) lower spreads

in RE financing, which continues to see high competition, and c) a possible decline

in the repo (interest) rate since a large proportion of assets are linked to a floating

rate, while a large proportion of liabilities (particularly domestic debt market and

foreign borrowings) are fixed rate. PFC had shared that a ~25bp decline in the

interest rates (over a one-year period) would impact its profits by ~INR3.2b.

Shareholding pattern (%)

As On

Jun-24 Mar-24 Jun-23

Promoter

56.0

DII

17.1

18.3

18.1

FII

17.9

17.2

17.5

Others

9.0

8.6

8.4

FII Includes depository receipts

Stock Performance (1-year)

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

We estimate yield compression of ~20bp over the next three years, which will

potentially result in a decline in NIM to ~3.5% in FY25/FY26E.

High earnings predictability from healthy loan growth and benign credit costs

PFC, being a specialized power financier, will be able to leverage its lending

opportunities across conventional generation, renewables, and logistics to deliver a

healthy 11% disbursement CAGR over FY24-FY27E. Considering the status of PFC’s

sanctioned loans (translating into disbursements in the subsequent years), we are

confident that PFC’s loan growth will remain healthy at ~15% CAGR over FY24-

FY27E. PFC has no NPAs in state-backed projects. All 21 projects that are classified

as NPAs are from the private sector. GNPA has declined to ~3.3% in FY24 from

~8.1% in FY20, and similarly, NNPA has declined to ~0.9% in FY24 from ~3.8% in

FY20. Over the last five years, PFC has increased the PCR on its Stage 3 loan assets

from ~51% in FY20 to ~74% in FY24. The company reported ~22% YoY PAT growth to

~INR145b in FY24. There is good visibility on a stable earnings growth trajectory for

PFC, and we estimate an adjusted PAT CAGR of ~12% over FY24-FY27E with RoA/RoE

of 2.9%/19% and a dividend yield of ~4.2% in FY27E.

Valuation and view

PFC (standalone) trades at 1.0x FY26E P/BV and 4.9x FY26E P/E. In our view, we are

in the early phase of this current power uptrend and there is strong visibility on loan

and earnings growth, given that stressed asset resolutions will continue (keeping

credit costs at <5bp) for the next three years.

We initiate coverage on PFC with a

BUY rating

and our SoTP (Sep’26E)-based TP of INR560 (based on 1.2x target

multiple for the PFC standalone business and INR211/share for PFC’s stake in REC

after holdco discount of 20%).

Key risks

The key downside risks to our investment thesis include: 1) increasing exposure to

the high-risk power projects without PPAs, such as merchant RE plants, pumped

storage, and green hydrogen projects; 2) expanding exposure to private

infrastructure projects that raises risks as these loans fall outside PFC’s core

business of lending to power projects; 3) the RBI’s proposed stricter provisioning

norms for project financing that increase the provisioning requirement to ~5.0%

from ~0.4% and which would be gradually brought down subject to conditions; and

4) compression in spreads and margins due to intensified competition.

PFC: SOTP – Sep’26E

Stake

PFC Standalone

REC Stake (Pre-Holdco)

Hold Co Discount (20%)

REC Stake (Post-Holdco)

Target Value

100

Target

Multiple

1.2

1.6

Value

(INR B)

1,153

873

175

698

1,852

INR per

350

265

210

560

% To

Total

Rationale

1.2x Sep'26 PBV

1.6x Sep'26 PBV

100

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

STORY IN CHARTS

Loan book CAGR of 15%...

Loans (INR b)

14%

10%

5.1

0.5

14%

YoY Gr. (%)

14%

16%

13%

15%

29.9

10.0

11.0

13.0

…supported by 11% disbursement CAGR

Disbursements (INR b)

67.4

48.9

YoY Gr. (%)

-42.0

Compression in spreads is inevitable… (%)

Avg. Yields

Avg Cost of funds

Interest Spread

…leading to a minor pressure on NIM as well

Net Interest…

3.8

11.1 10.4

10.0 10.0 10.4 10.2 9.8

9.9 10.1 10.0

9.9

2.3

3.6

3.2

3.6

3.5

8.2

7.9

7.1

7.2

2.8

7.2

6.9

6.7

7.1

2.8

7.4

7.3

2.6

2.9 2.4 2.9

3.2

3.3 3.1

2.7 2.6

Resolutions will result in a further improvement in asset

quality (%)

GNPA ratio

63.4

51.5 47.1

NNPA ratio

PCR

Stressed loans being resolved in NCLT and outside NCLT with

healthy provision covers (%)

Under NCLT

Outside NCLT

74.4 73.0 71.0 70.0

68.6 72.7

22.9

PAT CAGR of 12% over FY24-26E…

PAT (In b)

Growth YoY (%)

RoA/RoE of ~3%/19% in FY26

ROA (%)

19.5

ROE (%)

19.4

18.7

18.5

105

119

145

165

182

205

17.3

2.2

17.9

18.2

2.5

2.8

3.0

3.1

3.0

2.9

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Investment proposition in PFC



Loan growth to remain strong on the back of healthy sanction pipeline

Margins reasonably healthy even after building in spread compression

Diversified liability profile with greater hedging of foreign currency liabilities

Significant improvement in asset quality with stressed asset resolutions

Good visibility on earnings growth and franchise with healthy RoA/RoE

Disbursement/loan likely to clock CAGR of 11%/15% over FY24-27

PFC is a mono-line and a specialized power and infrastructure lender. Given that,

incrementally, a lot of the focus is on financing renewable energy and infrastructure

projects, PFC has also started exploring newer business avenues actively. It has

started financing electric vehicles/ EV charging infrastructure, smart metering

projects, FGD installations, bio-refinery projects, ethanol blending and selectively

even CGD projects.

Exhibit 29: Loan book CAGR of 15%...

Loans (INR b)

14%

10%

14%

YoY Gr. (%)

16%

14%

13%

Exhibit 30: …supported by 11% disbursement CAGR

Disbursements (INR b)

67.4

15%

29.9

5.1

0.5

10.0

11.0

13.0

48.9

YoY Gr. (%)

-42.0

Source: MOFSL, Company

PFC being a specialized power financier will be able to leverage the lending

opportunities across conventional generation, renewable and logistics to deliver a

healthy 11% CAGR in disbursements over FY24-FY27E. We expect the run-off in the

loan book (including pre-payments) to remain elevated at ~16% in FY25 and then

moderate to ~13% in FY26/FY27. This should translate in a loan CAGR of ~15% over

the next three fiscal years.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exposure to generation (including conventional) and transmission will start

picking up now

Exhibit 31: Sharp increase in exposure to distribution over the last four years driven by

disbursements under the DISCOM liquidity infusion package and LPS scheme (%)

Conventional Generation

FY21

FY22

Generation - Renewable

Transmission

FY24

Distribution

Others

1QFY25

Source: MOFSL, Company

FY23

The proportion of conventional generation projects in the loan mix has declined to

36% as of Jun’24 from ~51% in Mar’21. This was both a function of the aversion of

power lenders to conventional generation as well as the subsequent resolution of

stressed thermal generation projects. Decline in conventional generation was

complemented by higher proportion of loans in the renewable and distribution

segments.

India had committed under the 2015 Paris agreement to reduce greenhouse gas

emissions intensity by 33%-35% below 2005 levels, and to achieve 40% of installed

electric power capacity from non-fossil sources by 2030. In 2015, India had

embarked on an ambitious plan of installing 500 GW of renewable energy capacity

by 2030. Against this target, total renewable capacity (including Hydro) as of Jul’24

was ~200GW.

Renewable energy now contributes 13% to PFC’s loan mix and we

expect this to increase to ~25% over the next five years.

Exhibit 32: Marginal increase in exposure to private sector in the loan mix is

predominantly from renewable projects

State (%)

17%

16%

Private (%)

17%

19%

16%

83%

84%

83%

81%

FY19

FY20

FY21

FY22

FY23

FY24

1QFY25

Source: MOFSL, Company

PFC and REC were the nodal implementation agencies for the DISCOM package

announced by the GoI under the Atmanirbhar DISCOM Scheme and the Late

Payment Surcharge (LPS) rules and reforms. Disbursements under the scheme are

supported by state government guarantees and secured

gainst DISCOMS’

receivables in the form of electricity dues.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

PFC has also been actively financing private sector projects in RE since it has a

smaller execution timeline compared to thermal generation and has pre-agreed

PPAs. Further, the risk of NPAs in RE projects is significantly low. This led to a minor

increase in PFC’s exposure to private sector enterprises over the last two years.

Margins healthy despite building in a ~20bp compression in spreads

In 2015, prior to the introduction of the UDAY scheme, DISCOM debt had surged to

INR4.3t, with banks having an exposure of ~INR1.6t at interest rates of 14-15%.

Most of this debt was transferred to state governments, while the remaining portion

was restructured, resulting in banks taking haircut and offering lower interest rates

at the base rate plus 10bp (which amounted to ~400-500bp of haircut in interest

rates). Because of this, banks and most other wholesale NBFCs have in the recent

past avoided power financing, especially to financially stressed DISCOMS.

Exhibit 33: Compression in spreads is inevitable… (%)

Avg. Yields

11.1

Avg Cost of funds

Interest Spread

3.8

10.4 10.0 10.0 10.4 10.2 9.8

9.9 10.1 10.0 9.9

2.3

8.2

7.9

7.1

7.2

2.8

7.2

3.2

FY21

6.9

7.1

2.8

7.4

7.3

2.6

3.6

3.2

Exhibit 34: …leading to a minor pressure on NIM as well

Net Interest…

3.6

3.5

6.7

2.9 2.4 2.9

FY17

FY19

3.3 3.1

FY23

2.7 2.6

FY25E

FY27E

FY20

FY21

FY22

FY23

FY24

FY25E FY26E FY27E

Source: MOFSL, Company

We did a scenario analysis around the yields and the spreads that PFC will be able to

command as we believe the current yields are clearly unsustainable given the

increasing proportion of renewable and infrastructure loans (which are more

competitive segments) in the loan mix. Our belief that spreads will moderate is

predicated on the following reasons: a) As the financial health of the state DISCOMS

improve, they would expect PFC/REC to extend loans to them at interest rates that

are comparable to the state government bond yields; and b) With low systemic

credit growth, the banks will be looking to selectively re-finance operational and

good-quality power projects of PFC/REC and c) Increasing proportion of renewables

which is a highly competitive segment with relatively lower spreads.

Our scenario analysis suggests that even if spreads were to moderate to ~2.3% over

the next two years, PFC would still be able to deliver NIM of ~3.2% and RoA/RoE of

~2.7%/17.4%. This combination of return profile, along with a dividend yield of ~4%,

is better than many other PSU banks (albeit, at slightly cheaper valuations than

PFC/REC).

Exhibit 35: Scenario analysis on spreads/margins assuming other items remain unchanged

(%)

Scenario Analysis

Yields

CoF

Spreads

Margin

RoA

RoE

Scenario 1

9.65

7.30

2.30

3.20

2.7

17.4

Scenario 2

9.75

7.30

2.40

3.30

2.8

17.8

Base Case

9.95

7.30

2.60

3.50

3.0

18.7

Source: MOFSL, Company

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Under our base case, we estimate a yield of 9.95%, a spread of 2.6% and a margin of

3.5% in FY26E for PFC.

Diversified liability profile with better hedging of foreign currency liabilities

PFC has a diversified liability profile and a high share of domestic bonds and foreign-

currency borrowings in its liability mix. Unlike other NBFCs/HFCs, PFC does not fully

hedge its foreign currency borrowings. As of Jun’24, PFC enhanced its exchange risk

hedge ratio to 95% for the portfolio with residual maturity of up to five years (up

from 86% as of Mar’21). With this, PFC’s earnings are relatively insulated from

foreign exchange fluctuations.

Until 2023, a lot of RE projects leveraged USD bonds compared to INR term loans.

After 2023, the spreads between 10Y Indian and US G-Sec bond yields narrowed and

stood at <300bp as of Jun’24. USD borrowing rates have gone up faster than INR

borrowing rates. After hedging costs, it is now cheaper for power/infrastructure

projects to borrow in INR than in USD bonds.

Exhibit 36: Liability mix has a fair share of foreign borrowings

Domestic Bonds %

Foreign Bonds %

Term Loans %

Short term loans %

FY19

FY20

FY21

FY22

FY23

FY24

Q1FY25

Source: MOFSL, Company

The interest rate cut in the US will not change the attractiveness of INR term loans

since, at some point, the interest rate cuts will happen in India as well. Quite a few

power generators issued USD bonds when borrowing in USD was cheaper than

borrowing in INR. When these maturing USD bonds are refinanced with INR term

loans, it will offer another opportunity for loan growth for PFC/REC.

Exhibit 37: Liability mix is dominated by domestic bonds

2% 2%

18%

Domestic Bonds

RTL from Banks/FI’s

Foreign Currency Borrowing

Subordinated Bonds

18%

60%

54EC Bonds

Others like CC/OD/line of credit/LAFD

Source: Company, MOFSL; Note: Data as on Jun’24

PFC has a credit rating of AAA for domestic borrowings and is rated BBB- for all

external commercial borrowings. PFC has sovereign backing and much better access

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

to longer-duration liabilities (~60% of its borrowings come from domestic bonds,

most of which have a duration of 10 years), which enable PFC to keep a matched

ALM profile.

Earlier, only REC was allowed to raise money via 54EC bonds, but later PFC also got

approval from the Ministry of Power to raise liabilities through this route. 54EC

bonds now constitute ~2% of the borrowing mix for PFC.

Exhibit 38: Credit rating of PFC

Debt type

Domestic long-term instrument

Short term borrowing

Foreign borrowing

CRISIL

AAA

A1+

ICRA

AAA

A1+

Fitch/Care

Moody's/IR&R

AAA

A1+

BBB-/stable

Baa3(stable)

Source: MOFSL, Company; Data as of Mar’24

Stress asset resolutions have led to significant improvement in asset quality

Like most industry experts in the power sector, we also believe that the current

power uptrend will last for several years, driven by investments in both

conventional generation and RE capability. We do not want to underemphasize the

investments in transmission, which will be required to support the new installed

generation capacity coming up over the next five years.

We would not go so far as to say that there was no stress in the power sector or that

all stressed assets would be resolved in the near future. However, it is important to

highlight that asset quality risks in the current power uptrend have receded and we

would continue to see the resolution of stressed assets, which became distressed in

the last power down-cycle), over the next two years.

Exhibit 39: Resolutions will result in a further improvement in asset quality (%)

GNPA ratio

63.4

51.5

22.9

9.6

7.4

FY18

9.4

47.1

68.6

NNPA ratio

74.4

72.7

PCR

73.0

71.0

70.0

5.7

5.6

4.6

8.1

3.8

2.1

FY21

1.8

FY22

3.9

1.1

3.3

0.9

FY24

2.8 0.7

FY25E

2.3 0.7

FY26E

1.8 0.6

FY27E

FY19

FY20

FY23

Source: MOFSL, Company

Even though there is always an overarching risk in exposures to state government

entities, they have managed to remain standard because of the guarantees from

state government and repayments just before they turn NPAs. However, our

project-level analysis of PFC’s private sector loans (primarily large ticket exposures)

suggests that many of the erstwhile stressed projects are now at advanced stages of

resolution and that the net slippages over the next two years should be negative.

This should translate into an improvement in headline asset quality as well as keep

net credit costs benign at <5bp over FY25-FY27E.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 40: Nil NPAs in the public sector loan book of PFC

Gross Stage 3 %

Net Stage 3 %

Coverage %

9.8

8.7

FY16

FY17

1.8

FY18

FY19

FY20

FY21

FY22

FY23

FY24

1.6

Source: MOFSL, Company

PFC has no NPAs in state-backed projects. All the 21 projects that are classified as

NPAs are from the private sector. Resolutions in 13 NPA projects are being pursued

under NCLT, and PFC is trying to achieve a resolution in the remaining eight NPA

projects outside NCLT.

Among the stressed projects, three accounts with total outstanding of ~INR40b are

at advanced stages of resolution.



Among these three accounts,

Lanco Amarkantak

(600MW commissioned and

2x660MW expansions under Phase II), in which PFC has

total exposure of

~INR24b,

has received final NCLT approval to be acquired by Adani Power

through the insolvency resolution process. PFC had made provisions of ~76% for

this exposure and based on this resolution, there will be minor write-backs.

In addition, there is also

TRN Energy with outstanding exposure of ~INR11.4b

(600MW commissioned). The resolution of TRN is being pursued outside NCLT,

whereby the resolution plan has been formulated and approval from all the

consortium lenders is awaited.

The resolution of

KSK Mahanadi (6x600MW party commissioned project) with

an outstanding exposure of ~INR33b

is being pursued in NCLT. While PFC has a

~55% provision cover on this exposure, it expects >100% recovery against this

project based on the bids that have been received.

Exhibit 41: Only 18% of PFC’s entire loan book is unsecured, 43% backed by tangible assets

and 39% backed by bank/government guarantees

PFC loans security details (%)

Secured by Tangibe assets

Covered by Bank/ Government guarantees

Unsecured

FY19

FY20

FY21

FY22

FY23

FY24

Source: MOFSL, Company

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

If we look at the security details of the loans extended by PFC, nearly ~40% of PFC’s

loan book is backed by state govt. guarantees/bank guarantees, ~43% by tangible

assets and only 18% unsecured. Many of these unsecured loans are also eventually

backed by state-guarantees. Until some of those loans are approved for state-

guarantee, they are categorized as unsecured.

Exhibit 42: Private loan book of PFC has witnessed resolutions and improved PCR

Gross Stage 3 %

Net Stage 3 %

Coverage %

15.9 9.3

42.7 31.7

55.1 26.7

48.6 22.9

35.6 13.0

35.4 11.1

22.7 6.2

17.5 4.5

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24

Source: MOFSL, Company

Over the last five years, PFC has increased its provision coverage on its Stage 3 loan

assets to ~74% (compared to ~51% as of FY19). It is working on the resolutions of

stressed exposures both in NCLT as well as outside.

Exhibit 43: Stressed loans being resolved in NCLT and outside NCLT with healthy

provision covers (%)

Under NCLT

Outside NCLT

1QFY23

2QFY23

3QFY23

4QFY23

1QFY24

2QFY24

3QFY24

4QFY24

1QFY25

Source: MOFSL, Company

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 44:

PFC – A snapshot of NPA exposure along with expected recovery and current status of resolutions

Sr No

Projects

State

Fuel

Outstanding

(INR b)

NCLT

Stage of

Resolution

Expected

Recovery

COD

Status

Comments



Expression of interest was

seen with 26 active

participants. Company

has made provisions of

~55%



NCLT approval received

on 23rd August.

The

2 units

company has made ~76%

commissioned

provision. Write-backs in

the range of ~20%



Discussions on

resolutions going on and

Not

case is with COC.

commissioned

Company has made

provisions of 100%

KSK Mahanadi Chhattisgarh

Coal

(domestic)

Expected to get

3 units

resolved

NCLT

>100% commissioned

in this

(1800 MW)

fiscal

Lanco

Amarkantak

Chhattisgarh

Coal

(domestic)

NCLT

Advanced

~30%

Shri

Maaheshwar

Madhya

Pradesh

Hydel

Power

NCLT

Sinnar Power

Transmission

Delhi

Power

transmission

1.6

NCLT

Expression

of interest

from

participants

Commissioned



Made provisions of ~80%

India Power

Corporation

(Haldia)

Sinnar Thermal

(Rattan India Maharashtra

Nasik)

Konaseema

Andhra

Pradesh

Coal

(domestic)

Gas

NCLT

Outside

NCLT

Outside

NCLT

Outside

NCLT

2 units

commissioned



(300 MW)

40%



Made provisions of ~80%

IPCL Haldia

West Bengal

Imported

coal

9.6

Shiga Energy

Sikkim

Hydro

5.2

Outside

NCLT

Advanced

TRN Energy

Chhattisgarh

Coal

(domestic)

11.4

Outside

NCLT

Advanced

East Coast

Andhra

Pradesh

Bihar

Coal (domestic

& imported)

Coal

(domestic)

Thermal

Power

Coal

(domestic)

11.25

NCLT

Jas Infra (coal)

Ind Barath

Madras

KVK Nilachal

NCLT

Tamil Nadu

4.25

NCLT

Hyderabad

Andhra

Pradesh

Rajasthan

NCLT

EMP Power

0.16

Om Shakti

0.04



Under liquidation and

<20%

made provisions of

~100%



Expression of Interest

pending, once the same is

completed all the bids

will be finalized.



Approved the resolution

plan and it is expecting

that the other consortium

100% Commissioned

members will be

approving it soon. Expect

marginal write-backs.



Resolution plan is

finalized but the same is

100% Commissioned

pending for approval by

lenders. Expect marginal

write-backs.



Under liquidation and

<20%

made provisions of

~100%



Under liquidation and

10%-20%

made provisions of

~100%



Under liquidation and

20%

made provisions of

~100%



Under liquidation and

20%

made provisions of

~100%



Under liquidation and

made provisions of

~100%



Under liquidation and

made provisions of

~100%

Source: MOFSL, Company

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 45: PFC – Stressed loan projects that are in liquidation

Corporate

East Coast

Konaseema

Jas Infra (coal)

Ind Barath Madras

KVK Nilachal

Emp Power

Om Shakti

Outstanding amount

(INR b)

4.25

0.16

0.04

Details



Under liquidation and made provisions of ~100%

Source: MOFSL, Company

Exhibit 46: PFC – Stressed loan projects which are resolved

Name of the borrower

Mytrah Vayu Tungbhadra Private Limited

Dans Energy Private Limited

Suzlon Energy Ltd

South-East UP Power Transmission Company Limited

Jhabua Power Limited

Ind Barath Energy Utkal Ltd. (IBUEL)

Krishna Godavari Power Utilities Ltd.

GVK Ratle Hydro Electric Project Pvt. Ltd.

Essar Power MP Ltd

Astonfield Solar (Gujarat) Pvt. Ltd.

RS India Wind Energy Private Limited

Essar Power Transmission Corp. Ltd

Suzlon Energy Limited

RKM Powergen Pvt. Ltd.

Ratnagiri Gas & Power Pvt. Ltd.

Jal Power Corporation Ltd.

PFC’s

exposure

(INR b)

Remarks



Restructuring with change in ownership outside NCLT

Restructuring without change in ownership outside NCLT

One Time Settlement

Resolution with change in ownership through NCLT

Restructuring with change in ownership through NCLT

One time settlement

Restructuring with change in ownership through NCLT

One time settlement

Restructuring without change in ownership

Composite Resolution Plan including One time settlement

One time settlement

Year of

Resolution

FY24

FY23

FY22

FY21

FY20

Source: MOFSL, Company

PFC has demonstrated its ability to achieve stressed project resolutions. As of

Jun’24, PFC’s gross Stage 3 stood at 3.4%, down from ~8% as of FY20. The company

has also increased the provision cover on its Stage 3 loans, with the net Stage 3

declining to 0.9%. We believe that the provision coverage on Stage 3 loans is

adequate. Moreover, on the 13 projects that are being resolved under NCLT, PFC

now carries a PCR of 77%, while on the eight projects that are being resolved

outside NCLT, it now carries a PCR of 55%.

Good visibility on earnings growth and franchise with healthy RoA/RoE

Considering the status of PFC’s sanctioned loans (translating into disbursements in

the subsequent years), we are confident that PFC’s loan growth will remain healthy

at ~15% CAGR over FY24-FY26E. While NIM could compress, we believe that it could

be offset by better asset quality. Given our view on the power cycle, over the next at

least two years, we do not see any new stressed asset formation. In the absence of

any new stressed asset formation and the resolution of existing stressed projects,

credit costs will remain benign with a stronger possibility of write-backs over the

next two years.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

There is good visibility on a stable earnings growth trajectory for PFC and we

estimate a PAT CAGR of ~12% over FY24-FY26. This will translate into an RoA/RoE of

3%/19% in FY26.

Exhibit 47: PAT CAGR of 12% over FY24-26E…

PAT (In b)

Growth YoY (%)

Exhibit 48: RoA/RoE of ~3%/19% in FY26

ROA (%)

19.5

18.2

ROE (%)

19.4

18.7

18.5

FY21

105

FY22

119

FY23

145

FY24

165

FY25E

182

FY26E

205

FY27E

17.3

2.2

FY21

17.9

2.5

FY22

2.8

FY23

3.0

FY24

3.1

FY25E

3.0

FY26E

2.9

FY27E

Source: MOFSL, Company

Back in May’16, the GoI had mandated every CPSE to pay a minimum annual

dividend that is higher than either 30% of PAT or 5% of net worth. This was subject

to the maximum dividend allowed to be paid out under the extant legal provisions.

Exhibit 50: …driven by dividend policy that is higher of

either 30% of PAT or 5% of the net worth

18.6

15.0

16.5

Dividend pay-out (%)

44.4

Dividend to net worth (%)

Exhibit 49: Healthy payout of dividends…

DPS (INR)

12.0

13.3

13.5

31.3

31.6

9.5

10.0

30.1

31.0

30.0

5.6

5.0

5.3

5.1

5.6

5.4

5.3

5.2

FY20

FY21

FY22

FY23

FY24 FY25E FY26E FY27E

Source: MOFSL, Company

FY20

FY21

FY22

FY23

FY24 FY25E FY26E FY27E

Source: MOFSL, Company

Exhibit 51: Dividend yield of ~3.8% in FY26

Dividend Yield (%)

3.8

4.2

2.2

2.3

2.7

3.0

3.1

3.4

FY20

FY21

FY22

FY23

FY24

FY25E

FY26E

FY27E

Source: MOFSL, Company

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

PFC: Valuation and View

We believe that given the niche nature of power financing and the fact that PFC/REC

are the nodal implementation agencies for the power reforms initiated by the GoI,

PFC will always remain relevant. Moreover, with opportunities in RE, EVs, and

charging infrastructure, and the modernization of the existing thermal power plants,

infrastructure and logistics, we believe PFC will be able to demonstrate a healthy

loan growth with receding risks on asset quality.

We estimate a PAT CAGR of ~12% for PFC over FY24-FY26 with an RoA/RoE of

3.0%/19% and a dividend yield of ~3.8% in FY26. The stock trades at 1.0x FY26E

standalone P/ABV and we believe that the risk-rewards are favorable in the current

power uptrend. Moreover, PFC’s stock price has corrected by ~25% from its recent

highs, and now even provides a margin of safety in valuations.

We initiate coverage on PFC with a BUY rating

with our SoTP (Sep’26E)-based TP of

INR560 (based on 1.2x target multiple for the standalone business and INR211/share

for PFC’s stake in REC after holdco discount of 20%).

Exhibit 52: PFC - One-year forward P/E

13.0

10.0

7.0

4.0

1.0

P/E (x)

Min (x)

Avg (x)

+1SD

Max (x)

-1SD

Exhibit 53: PFC - One-year forward P/B

2.2

1.8

1.4

P/B (x)

Min (x)

Avg (x)

+1SD

Max (x)

-1SD

10.8

1.9

5.8

3.8

1.8

8.3

1.0

0.6

0.3

1.0

0.6

0.2

1.5

0.3

Source: MOFSL, Company

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

PFC: Key risks



Increase in exposure to projects without PPA:

Lending to power projects

without PPAs was a significant reason behind the financial strain in the past.

While power sector lenders have since made PPAs a prerequisite for loan

disbursal, there are still concerns about renewed exposure to projects lacking

these PPAs. High-risk areas include: merchant RE plants (NBFCs have started

partial lending without PPAs), pumped storage plants (which require significant

capital before securing PPAs), and green hydrogen projects (which lack a

defined PPA structure and have high capex requirements).

Expanding exposure to private infrastructure loans:

Until recently, PFC

primarily extended loans to government entities in the infrastructure sector,

with minimal exposure to private firms. However, any future increase in lending

to private infrastructure or industrial projects could pose significant risks. The

company acknowledged sanctioning loans to Shapoorji Pallonji Group, which we

believe could be secured by the Group’s real estate cash flows and shares in

Tata Sons. Private loans (particularly those to promoters) fall outside the core

business of PFC.

RBI's draft stricter provisioning norms on project financing:

The RBI has

proposed stricter lending norms for project financing, increasing provisioning

requirements from 0.4% to 5%, with gradual reductions to 2.5% and 1% as

projects become operational, subject to conditions. These changes apply across

infrastructure, non-infrastructure, and commercial real estate projects for

regulated financial entities. Additional guidelines, such as a minimum 10%

exposure for consortium lending, are also included. While we see a low

probability of these draft guidelines on project financing being implemented in

their current form, it remains a risk to the overall sector.

Compression in spreads and margins:

We have highlighted earlier that the

current yields are clearly not sustainable due to the following reasons: a) As the

financial health of DISCOMs improves, states would expect PFC/REC to extend

loans to them at interest rates that are comparable to the state government

bond yields; b) With low systemic credit growth, banks will be looking to

selectively re-finance operational and good-quality power projects of PFC/REC;

and c) Increasing proportion of RE, which is a highly competitive segment with

relatively lower spreads.

Asset quality stress from any further deterioration in health of private power

projects or DISCOMS:

The government has initiated many reforms in the power

sector, which should potentially improve the health of the sector. However, we

cannot completely rule out any adverse impact on the provisioning and credit

costs because of slippages in some of the large private sector accounts and the

adverse effect on interest income from any DISCOM bailouts provided by the

government.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

PFC: ESG initiatives



As of FY24, PFC is the largest RE sector financier in India, having supported

50GW of RE capacity in India, which is around ~25% of India’s total non-fossil

fuel based installed capacity (around 190.57GW as per CEA, March 2024). PFC

has cumulatively disbursed over INR1t to the RE sector.

To oversee the activities of CSR, PFC has in place a board level CSR & SD

Committee of Directors headed by an independent director. For FY24, the board

approved the CSR budget of INR2.15b.

PFC’s Board comprises seven directors, including three independent directors

and one woman director.

The members of the Board are appointed by the President of India through the

administrative ministry, which, inter alia, fixes the remuneration of such whole-

time directors through their respective appointment orders/pay fixation orders.

PFC: Pillars of ESG Vision

Source: Company, MOFSL

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

About PFC

A country’s energy usage is an important measure to gauge its advancement and

expansion and PFC plays a crucial role in the rise of India as a global player in the

energy sector. PFC endeavors to maintain a robust evaluation and appraisal process,

which in turn helps the company maintain a healthy loan book despite the hardships

in the power sector.

Description



PFC is a power and infrastructure finance company under the administrative

control of the Ministry of Power.

PFC has been conferred with the title of Maharatna CPSE and is designated as a

"Nodal Agency" for development of Integrated Power Development Scheme

(IPDS), Ultra Mega Power Projects (UMPPs) and "Bid Process Coordinator" for

Independent Transmission Projects (ITPs).

PFC provides financial assistance to power projects in the field of generation,

transmission and distribution and has also ventured into financing of

development of coal mines and oil and gas pipelines.

PFC’s continued focus on expansion and diversification has led to its foray into

the infrastructure and logistics sectors, wherein it caters to EV fleet, charging

infrastructure, roads, ports, metro rail, smart cities, and other significant

infrastructure projects.

Further, it extends consultancy and advisory services in strategic, financial,

regulatory and capacity building skills under one umbrella.

In Mar’19, the Ministry of Power approved PFC to take over a ~52.6% stake of

the Government of India (GoI) in REC.

PFC is currently led by Ms. Parminder Chopra, Chairman and Managing

Director. She earlier held the role of Director (Finance) at PFC since Jul’20.

Product portfolio



Fund based:

Project term loans (rupee and foreign currency), debt refinancing,

lease financing for power wind projects and purchase of equipment, short-/

medium-term loans to equipment manufacturers, line of credit for import of

coal, grants/interest-free loans for studies/ consultancies, credit facility for

purchase of power through Power Exchange, etc.

Non-fund based:

Guarantee for performance of contract/ obligations w.r.t. fuel

supply agreement, letter of comfort, policy for guarantee of credit

enhancement, etc.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 54: Group structure

REC (52.63%)

Subsidiaries

PFC Consulting

(100%)

PFC

PFC Infra

Finance

IFSC(100%)

Associates

Ultra Mega

Power Projects

(100%)



PFC Infra Finance:

Subsidiary to provide financial solutions for infrastructure

projects across multiple sectors.

PFC Projects:

Coastal Karnataka Power Limited (CKPL) was created to develop

ultra-mega power projects in Karnataka, as mandated by the Government of

India. It can also participate in bidding for lender-backed resolution plans

through PFC.

PFC Consulting:

provides services like transaction advisory, project

development, project management (e.g., RDSS), and policy support for the

Ministry of Power.

President of India

FIIs and FPIs

Mutual Funds

7.1

Resident Individual

Others

Exhibit 55: Shareholding of PFC (%)

7.3

11.7

56.0

17.9

Source: MOFSL, Company; Data as on Jun’24

Exhibit 56: Top 10 shareholders of PFC

Sr no.

Shareholder

% holding

Republic of India

55.99%

Life Insurance Corp of India

2.14%

HDFC Asset Management Co Ltd

2.02%

Vanguard Group Inc

1.81%

Blackrock Inc

1.66%

Kotak Mahindra Asset Management Co Ltd

1.60%

Nippon Life India Asset Management Ltd

1.57%

DSP Investment Managers Pvt Ltd

1.25%

Capital Group Cos Inc

0.70%

Dimensional Fund Advisors LP

0.67%

Source: MOFSL, Bloomberg; Data as on 07-Oct-2024

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

PFC: Bull and Bear cases

Bull case

In our bull case, we assume ~18% AUM CAGR, driven by a ~18% disbursement

CAGR over FY24-FY27E.



We expect spreads/margins to remain largely stable at ~2.8%/3.7% by FY27.



We estimate NII and PPOP CAGR of ~19% and 17% respectively, over FY24-27

owing to strong loan growth and the company’s ability to deliver operating

efficiencies.



We estimate cost ratios to improve over the next three years. Average credit

costs of ~2bp-5bp can lead to ~16% PAT CAGR over FY24-FY27.



Bear case



In our bear case, we assume ~12% AUM CAGR over FY24-FY27.

We expect spreads to decline ~35bp and NIM to contract ~25bp by FY27.

We estimate NII and PPOP CAGR of ~10% each over FY24-27.

We project average credit costs of ~10-20bp to drive PAT CAGR of ~6% over

FY24-FY27

Exhibit 58: PFC Bear case scenario

FY26E

66,33,683

3.6

2,12,913

2,34,920

431

2,34,490

1,91,109

3.0

19.6

316

FY27E

79,49,560

3.7

2,60,367

2,84,601

7,355

2,77,245

2,25,955

3.0

20.2

364

1.4

415

245

660

50%

Source: MOFSL, Company

INR m

AUM

YoY Growth (%)

NIM (%)

NII

PPoP

Credit Costs

PBT

PAT

Growth (%)

RoA (%)

RoE (%)

BV (INR)

PFC Target Multiple

PFC Standalone (INR)

REC stake post hold-co

discount (INR)

PFC SOTP Target price (INR)

Downside (%)

FY25E

54,34,273

3.6

1,77,569

1,97,523

(4,192)

2,01,715

1,64,398

3.1

19.4

275

FY26E

60,94,325

3.4

1,91,961

2,13,969

18,010

1,95,959

1,59,706

-3

2.7

16.6

309

FY27E

68,03,856

3.3

2,08,008

2,32,241

20,561

2,11,680

1,72,519

2.6

16.0

345

0.9

245

135

380

-13%

Source: MOFSL, Company

Exhibit 57: PFC Bull case scenario

INR m

AUM

YoY Growth (%)

NIM (%)

NII

PPoP

Credit Costs

PBT

PAT

Growth (%)

RoA (%)

RoE (%)

BV (INR)

PFC Target Multiple

PFC Standalone (INR)

REC stake post hold-co

discount (INR)

PFC SOTP Target price (INR)

Upside (%)

FY25E

55,36,398

3.6

1,80,464

2,00,418

(3,293)

2,03,712

1,66,025

3.1

19.5

275

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

PFC: SWOT analysis



Improving asset

quality with GS3 of

<3.4% and NS3 of <1%.

Healthy sanction

pipeline will help the

company achieve

strong loan growth.



Expanding exposure

to private

infrastructure

projects raises risks

as these loans fall

outside PFC’s core

business of lending to

power projects.

Increasing exposure

to high risk power

projects without

PPAs, such as

merchant RE plants,

pumped storage, and

green hydrogen

projects.



Significant

acceleration in

investments in

renewable energy

will help the

company increase

disbursements.

The National

Infrastructure

Pipeline presents

opportunity of

~INR35t across

electricity generation

and T&D, which will

lead to strong loan

growth of ~15% over

FY24-27.



Increasing

competitiveness

through active

participation by

banks in renewable

financing might lead

to margin

compression.

The RBI’s draft

circular on increasing

provisioning

requirements from

~0.4% to ~5.0%,

which would be

gradually brought

down subject to

conditions.



October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

PFC: Board of Directors

Smt. Parminder Chopra

Chairman and MD

Smt. Parminder Chopra has assumed the

charge w.e.f. 14 Aug’23. Previously, she held

the additional charge of Chairman and

Managing Director (CMD), w.e.f. 01.06.2023

and was Director (Finance), PFC since

01.07.2020. During her term as Director

(Finance), she spearheaded the Finance

division, leading to the highest net profit,

highest net worth, and lowest NPA levels.

Shri Rajiv Ranjan Jha

Director (Projects)

Shri Rajiv Ranjan Jha has been working with

PFC since Mar’97. He has overall 33 years of

experience and had been holding the position

of Executive Director (Projects), PFC since 27

May’19. He had earlier handled the entire

loan portfolio in Consortium Lending with PFC

as lead FI.

Shri Manoj Sharma

Director (Commercial)

Shri Manoj Sharma is a Chartered Accountant

with a degree in law (LLB). He joined PFC in

1990 and was working as Executive Director

(In Charge) of Commercial Division before

assuming charge as Director (Commercial),

PFC. He has more than 30 years of experience

in the power sector.

Shri Sandeep Kumar

Director (Finance)

Shri Sandeep Kumar has assumed the charge

of Director (Finance) at PFC w.e.f. 11 July

2024. Shri Sandeep Kumar has a distinguished

career spanning over 34 years in the power

and financial sectors. Throughout his tenure

at PFC, he has held various positions within

the finance function.

Shri Shashank Misra

Director (Govt. Nominee)

Shri Shashank Misra is an IAS officer and

holds a B. Tech degree in Electrical

Engineering from IIT Delhi. Presently, he is

posted as Joint Secretory in the Ministry of

Power, Government of India. Prior to joining

the Ministry of Power, he served in the Dept.

of Revenue, Ministry of Finance.

Shri Bhaskar Bhattacharya

Independent Director

Shri Bhaskar Bhattacharya is an honors

graduate in Commerce and has a bachelor’s

degree in Law. He also holds a Post Graduate

Diploma in Business Management. He has been

acting as an Advocate for more than 24 years.

Smt. Usha Sajeev Nair

Independent Director

Smt. Usha Sajeev Nair holds a graduate

degree in Bachelors of Arts. She is a female

entrepreneur engaged in her own business in

Dadra and Nagar Haveli and Daman and Diu,

providing employment and support to a

number of families for quite some time now.

Shri Prasanna Tantri

Independent Director

Shri Prasanna Tantri holds a B. Com degree

from Mangalore University and is a qualified

Cost Accountant. . At present, he is an

Associate Professor in the Finance area at the

Indian School of Business and Executive

Director of the Centre for Analytical Finance

at ISB.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

PFC: Financials and valuations

PFC: Income Statement (Standalone)

Y/E March

Interest on loans

Interest exp & other charges

Net Interest Income

Change (%)

Other operating income

Exchg Gain/(loss) on Forex loans

Other Income

Net Income

Change (%)

Employee Cost

Administrative Exp

Depreciation

Operating Income

Change (%)

Total Provisions

% to operating income

PBT

Tax

Tax Rate (%)

Reported PAT

Adjusted PAT

(Excluding REC Dividend)

Change (%)

FY19

284

190

7.8

-5

-8.0

-8.7

-9

-9.6

100

28.7

12.4

FY20

320

219

101

6.9

-26

2.3

10.7

30.5

-28.2

FY21

361

232

130

28.3

146

50.5

141

51.5

24.8

106

16.6

56.7

FY22

367

227

140

8.3

-9

155

6.2

149

6.0

14.9

127

17.3

105

18.7

FY23

376

233

144

2.4

-20

147

-5.0

141

-5.4

-3

-2.1

144

17.8

119

113

15.4

FY24

436

280

156

8.8

182

23.7

176

24.2

-2

-1.0

177

18.4

145

139

23.5

FY25E

503

325

178

14.1

206

12.8

198

12.9

-4

-1.9

202

18.5

165

160

14.8

FY26E

571

370

202

13.1

232

12.6

224

12.8

0.3

223

18.5

182

176

10.2

(INR b)

FY27E

657

426

231

14.6

264

14.0

255

14.2

1.5

252

18.5

205

199

12.8

(INR b)

FY27E

1,145

1,178

6,207

14.9

7,385

245

5.0

7,100

15.2

7,397

PFC Balance Sheet (Standalone)

Y/E March

Capital

Reserves & Surplus

Net Worth

Deferred Tax Liability

Networth (incl DTL)

Interest subsidy from GoI

Borrowings

Change (%)

Total Liabilities

Investments

Change (%)

Loans

Change (%)

Forex monetary reserves

Net Fixed Assets

Net Current Assets

Total Assets

E: MOFSL Estimates

FY19

406

433

2,952

24.7

3,385

166

558.2

3,032

14.0

142

3,340

FY20

425

452

3,103

5.1

3,554

165

-0.7

3,341

10.2

3,509

FY21

498

524

3,330

7.3

3,854

160

-3.0

3,601

7.8

3,809

FY22

567

594

3,274

-1.7

3,868

161

0.7

3,609

0.2

3,811

FY23

656

682

3,704

13.1

4,386

173

7.6

4,108

13.8

4,298

FY24

759

792

4,164

12.4

4,956

202

16.9

4,699

14.4

4,905

FY25E

874

907

4,679

12.4

5,586

222

10.0

5,316

13.1

5,586

FY26E

1,001

1,034

5,403

15.5

6,438

234

5.0

6,164

15.9

6,444

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

PFC: Financials and valuations

PFC Loans and Disbursements

Gross Loans (INR b)

YoY Growth (%)

Disbursements (INR b)

YoY Growth (%)

FY19

3,147

677

FY20

3,449

680

FY21

3,708

883

FY22

3,731

512

-42

FY23

4,225

858

FY24

4,815

1,277

FY25E

5,473

1,404

FY26E

6,320

1,559

FY27E

7,260

1,761

PFC: Ratios

Y/E March

Spreads Analysis (%)

Avg. Yields

Avg Cost of Funds

Interest Spread

NIM

Profitability Ratios (%)

RoE

RoA

Efficiency Ratios (%)

Int. Expended/Int. Earned

Other operating Inc./Net Income

Other Income/Net Income

Op. Exps./Net Income

Empl. Cost/Op. Exps.

Asset-Liability Profile (%)

Loans/Borrowings Ratio (x)

Assets/Networth (x)

Debt/Equity (x)

Asset Quality (%)

Gross Stage 3

Net Stage 3

PCR

Credit costs

FY19

10.0

7.1

2.9

3.1

FY20

10.0

7.2

2.8

2.3

FY21

10.4

7.2

3.2

3.8

FY22

10.2

6.9

3.3

3.6

FY23

9.8

6.7

3.1

3.2

FY24

9.9

7.1

2.79

3.6

FY25E

10.1

7.4

2.70

3.6

FY26E

10.0

7.3

2.62

3.5

FY27E

9.9

7.3

2.57

3.5

17.3

2.2

12.8

1.6

17.3

2.2

17.9

2.5

18.2

2.8

19.5

3.0

19.4

3.1

18.7

3.0

18.53

2.9

66.8

5.8

0.2

4.2

43.5

68.4

23.0

0.1

4.1

48.5

64.2

10.1

0.1

3.5

37.9

61.8

15.1

0.3

3.7

37.1

61.8

15.9

0.1

4.1

36.3

64.2

13.0

0.1

3.7

36.3

64.6

12.7

0.1

3.6

35.2

64.7

12.4

0.1

3.5

34.6

64.8

12.0

0.2

3.3

34.2

103

7.7

6.8

108

7.8

6.9

108

7.3

6.4

110

6.4

5.5

111

6.3

5.4

113

6.2

5.3

114

6.2

5.2

114

6.2

5.2

114

6.3

5.3

9.4

4.6

51.5

-0.31

8.1

3.8

47.1

0.31

5.7

2.1

63.4

1.01

5.6

1.8

68.6

0.62

3.9

1.1

72.7

-0.08

3.3

0.9

74.4

-0.04

2.8

0.7

73.0

-0.08

2.3

0.7

71.0

0.01

1.8

0.6

70.0

0.06

Valuations

Book Value (INR)

BV Growth (%)

Price-BV (x)

Adjusted Book Value (INR)

ABV Growth (%)

Price-ABV (x)

EPS (INR)

EPS Growth (%)

Price-Earnings (x)

Core EPS (INR)

Adj Core EPS Growth (%)

Adj. Price-Core EPS (x)

DPS

Dividend Yield (%)

E: MOFSL Estimates

164

17.1

2.7

150

24.8

1.7

26.3

4.2

16.7

27.7

12.4

9.5

0.0

171

4.3

2.6

116

-22.8

2.3

21.4

-18.7

20.5

19.9

-28.2

13.2

9.5

2.2

198

16.0

2.2

144

23.6

1.8

32.0

49.3

13.7

31.2

56.7

8.4

10.0

2.3

225

13.3

2.0

170

18.4

1.5

38.0

18.7

11.6

37.0

18.7

7.1

12.0

2.7

258

14.9

1.7

203

19.7

1.3

44.0

15.8

10.0

42.8

15.4

6.1

13.3

3.0

240

-7.1

1.8

196

-3.6

1.3

43.5

-1.0

10.1

42.3

-1.2

6.2

13.5

3.1

275

14.6

1.6

231

17.8

1.1

49.9

14.6

8.8

48.5

14.8

5.4

15.0

3.4

313

14.0

1.4

270

16.7

1.0

55.0

10.3

8.0

53.5

10.2

4.9

16.5

3.8

357

13.9

1.2

313

16.1

0.8

62.1

12.8

7.1

60.3

12.8

4.4

18.6

4.2

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

PFC: Du Pont Analysis %

Interest income

Interest expenses

Net Interest Income

Other Operating Income

Other Income

Total Income

Operating expenses

Operating profits

Provisions

PBT

Taxation

RoA

Leverage (x)

RoE

E: MOFSL Estimates

FY19

9.1

6.1

3.0

0.2

-0.2

3.0

0.1

2.9

-0.3

3.2

0.9

2.3

7.8

17.7

FY20

9.0

6.2

2.9

0.6

-0.7

2.7

0.1

2.6

0.3

2.4

0.7

1.6

8.0

13.1

FY21

9.6

6.2

3.4

0.4

0.0

3.9

0.1

3.7

0.9

2.8

0.5

2.3

7.7

18.1

FY22

9.3

5.8

3.6

0.6

-0.2

3.9

0.1

3.8

0.6

3.2

0.6

2.7

7.0

18.8

FY23

9.0

5.5

3.4

0.6

-0.5

3.5

0.1

3.4

-0.1

3.4

0.6

2.8

6.6

18.6

FY24

9.2

5.9

3.3

0.5

0.0

3.8

0.1

3.7

0.0

3.7

0.7

3.0

6.4

19.6

FY25E

9.4

6.0

3.3

0.5

0.0

3.8

0.1

3.7

-0.1

3.8

0.7

3.1

6.3

19.4

FY26E

9.3

6.0

3.3

0.5

0.0

3.8

0.1

3.6

0.0

3.6

0.7

3.0

6.3

18.7

FY27E

9.3

6.0

3.3

0.4

0.0

3.8

0.1

3.6

0.1

3.6

0.7

2.9

6.4

18.5

October 2024

Power Financiers - Thematic: The Power

Initiating

to India’s energy transition

Play: Key

Coverage | Sector: NBFC

7 October 2024

REC

BSE SENSEX

81,050

S&P CNX

24,796

CMP: INR500

TP: INR630 (+26%)

Buy

Charging ahead with renewable might

Strong loan growth and benign credit costs render good visibility on earnings



Stock Info

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

12M Avg Val (INR M)

Free float (%)

RECL IN

2633

1317 / 15.7

654 / 259

-17/-4/49

7750

47.4



Financials Snapshot (INR b)

Y/E March

FY25E FY26E FY27E

NII

196

226

264

PPP

196

228

266

PAT

159

183

211

EPS (INR)

60.5

69.3

80.1

EPS Gr. (%)

BV/Shr (INR)

306

357

417

ABV/Shr (INR)

302

354

413

RoAA (%)

2.7

2.6

RoE (%)

21.3

20.9

20.7

Div. Payout (%)

29.8

29.6

29.3

Valuation

P/E (x)

8.3

7.2

6.2

P/BV (x)

1.6

1.4

1.2

Div. Yield (%)

3.6

4.1

4.7

Shareholding pattern (%)

As On

Jun-24 Mar-24 Jun-23

Promoter

52.6

DII

14.7

15.5

12.1

FII

20.4

19.9

21.9

Others

12.2

12.0

13.4

FII Includes depository receipts

Stock Performance (1-year)

REC is one of the two major public sector power and infrastructure asset finance

companies. Present across the value chain, a major part of its exposure as of Jun’24

caters to distribution and generation (~41% and ~28%, respectively) and only ~11%

of its loans are towards the private sector. REC has intensified its efforts in financing

renewable energy and infrastructure/logistics projects, resulting in a marked

increase in the proportion of these segments within its sanction mix.

In the current power upcycle, which is propelled by investments in power generation

and transmission, the loan growth for REC is likely to remain robust over the next

few years. Our asset quality analysis indicates that, similar to PFC, REC will also

continue to experience resolutions of its stressed assets. This trend is anticipated to

lead to notably benign credit costs over the next two to three years.

Strong loan CAGR of ~18% likely over the next three years

National Infrastructure Pipeline (NIP) forecasts an investment opportunity of

~INR35t across electricity generation (both renewable and non-renewable) as well

as transmission and distribution (T&D). REC reported ~22% loan CAGR over FY10-

FY15, driven by robust capex in the thermal power segments and its higher

exposure to distribution utilities. However, this was followed by only 12% CAGR in

the loan book during FY15-FY22 because of: a) subsequent stresses in thermal

generation projects, b) losses incurred by distribution utilities, and c) shift in focus

towards renewable energy projects.

During FY23-FY24, REC’s disbursements remained strong, propelled by

disbursements towards the RDSS, RBPF, and LPS schemes.

Over the next five

years, REC aims to capture a market share of 30-35% in thermal generation

projects and ~20% in renewable projects. Additionally, the contribution of

renewables in the FY24 sanction mix improved to ~38% (from ~8% in FY23).

These sanctions are likely to translate into stronger disbursement growth over

the next three years. We expect ~18% loan CAGR for REC over FY24-FY27.

Compression in spreads due to high competitive intensity

Renewables represent a highly competitive segment with significantly narrower

spreads than conventional generation or distribution projects. As the proportion of

renewables in the loan mix increases, we anticipate some compression in the

spreads. Banks have also been aggressive and willing to finance high-quality

operational power projects. We estimate a yield compression of ~30bp over the

next two years, driven by a shift in the loan mix and heightened competitive

intensity. Consequently, we estimate spreads to decline ~20bp over the next two

years, resulting in ~10bp NIM compression to 3.5% by FY26. A significant portion of

REC's liability mix is fixed, while a substantial part of its asset portfolio is floating.

This disparity could exert additional downward pressure on spreads and NIM if

there is a reduction in repo rates in the second half of FY25.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Assset quality strength to sustain in the current power upcycle

REC’s GNPA has receded from its last peak of ~7% during FY18-FY19 to ~2.6% as of

Jun’24, with a provision coverage ratio (PCR) of ~69%. This improvement in asset

quality has been driven by the resolution of stressed assets, which has accelerated

over the last three years.

Currently, REC has 16 exposures classified under Stage 3. For 12 of these exposures,

it has maintained a provision coverage of ~71%, and these are being resolved under

the National Company Law Tribunal (NCLT). All stressed exposures are related to the

private sector, with none originating from the government sector. We anticipate

that the resolution of stressed assets will continue over the next two years, as

distressed assets are available at a fraction of the total investments required to

establish a greenfield generation project.

For REC, the exposures to Nagai Power and Lanco Amarkantak are effectively

resolved,

as both have received NCLT approval in Jul’24 and Aug’24, respectively.

The company has indicated that it is in the advanced stages of resolution for

Sinnar Power Nashik, Hiranmaye, KSK Mahanadi in Chattisgarh, TRN Energy,

Bhadreshwar Corporate Power, and Konaseema Gas Power.

Healthy earnings growth trajectory with ~21% RoE over FY25-27E

REC has delivered a loan CAGR of ~11% over FY21-FY24, and its loan book stood at

~INR5.3t as of Jun’24. We expect the company to report a loan CAGR of ~18% over

FY24-27 and scale its loan book to ~INR8.4t by FY27. Given the ongoing resolutions

of stressed thermal projects and investments in scaling up renewable energy

sources, the new stressed asset formation will be minimal in the current power

upcycle. The company posted an earnings CAGR of ~19% over FY21-FY24 and is

projected to record an earnings CAGR of ~15% over FY24-FY27, along with an

RoA/RoE of 2.6%/21% and dividend yield of ~4.7% in FY27.

Valuations and View

REC trades at 1.4x FY26E P/ABV, and we believe that the risk-rewards are attractive

considering the strong visibility on loan growth, earnings growth, and healthy return

ratios. All these factors support a very healthy outlook on asset quality.

We initiate

coverage on REC with a BUY rating

and a TP of INR630 (premised on a target

multiple of 1.6x Sep’26E P/ABV).

Key risks

The key downside risks to our investment thesis include: 1) increasing exposure to

the high-risk power projects without PPAs, such as merchant RE plants, pumped

storage, and green hydrogen projects; 2) expanding exposure to private

infrastructure projects that raises risks as these loans fall outside REC’s core

business of lending to power projects; 3) the RBI’s proposed stricter provisioning

norms for project financing that increase the provisioning requirement to ~5.0%

from ~0.4% and which would be gradually brought down subject to conditions; and

4) compression in spreads and margins due to intensified competition.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

STORY IN CHARTS

Loan book CAGR of 18% over FY24-27E…

Loans (INR b)

642

(31)

Growth YoY (%)

…supported by 23% disbursement CAGR

Disbursements (INR b)

Growth YoY (%)

Intense competition and increase in renewables in the mix

will lead to compression in spreads

Yield on loans %

3.5

3.02

2.81

Cost of Funds %

2.9

2.7

2.6

Exposure to private entities gradually increasing, perhaps

because of higher exposures in renewables and

infrastructure

State (%)

17%

Spread %

2.5

Private (%)

17%

19%

2.75

16%

7.3

7.2

7.1

6.9

6.8

6.7

9.7 10.1 10.1 10.3 9.7

9.9

9.8

9.6

9.5

83%

84%

83%

81%

Negligible credit costs over FY25-FY27E

Credit Cost (%)

0.94

0.71

0.31

0.09

Stressed asset resolutions have led to an improvement in

asset quality

GNPA %

NNPA %

70.6

68.5

68.0

PCR %

68.0

66.0

0.03

7.2

6.6

3.8

3.3

1.7

4.8

67.4

0.03

(0.29) (0.05) (0.01)

1.5

1.0 2.70.9 2.10.7 1.60.5 1.20.4

3.4

4.5

PAT CAGR of ~15% over FY24-27

PAT (INR b)

(15)

YoY Growth (%)

Healthy RoA/RoE of ~2.6%/21.0% in FY27

RoA

21.2

14.1

21.1

20.3

22.2

RoE

21.3

20.9

20.7

1.5

2.2

2.5

2.8

2.7

2.6

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Investment proposition in REC

Disbursement and loan CAGR of 23% and 18%, respectively, over FY24-FY27E

NIM compression can be mitigated by leveraging credit costs

Diversified liabilities; borrower preference for rupee term loans over USD bonds

Stressed asset resolutions to continue; credit cost outlook remains benign

Healthy earnings growth trajectory; RoE of ~21% over FY25-27E

1. Disbursement/loan CAGR of 23%/18% during FY24-27E

Given the increasing emphasis on financing renewable energy and infrastructure

projects, REC has begun actively exploring new business avenues. It has started

financing electric vehicles (EV)/EV charging infrastructure, smart metering projects,

FGD installations, bio-refinery projects, and ethanol blending initiatives.

Exhibit 59: Loan book CAGR of 18% over FY24-27E…

Loans (INR b)

Growth YoY (%)

642

(31)

Exhibit 60: …supported by 23% disbursement CAGR

Disbursements (INR b)

Growth YoY (%)

Source: MOFSL, Company

Renewables and infrastructure/logistics formed 8% and 12% of the loan mix for REC

as of Jun’24, respectively. Management has indicated that by FY30, it aims to

achieve a loan mix of 30% from renewable energy, ~20% from infrastructure/

logistics, and ~50% from conventional generation and T&D.

Exhibit 61: Share of renewable at ~8% as of Jun’24…

Generation

Distribution

FY19

FY20

Exhibit 62: …which is expected to jump to ~30% by FY30

Target Loan Mix in FY30 (%)

Convention

generation,

transmissio

n and

distributio…

Loan Mix (%)

Renewable Energy

Infra & logistics

FY22

FY23

Transmission

Others

FY24

1QFY25

Renewable

30%

FY21

Infrastructu

re and

logistics

20%

Source: MOFSL, Company

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 63: REC’s infrastructure loan sanctions for FY23

FY23- Infra loans sanctions

Ports Shipping,

waterways

Drinking water

12%

Airport Private Sector

4% Refinery

Hospitals

Education

Institutions

Highways

20%

Communicaton

Metro

42%

Source: MOFSL, Company

Exhibit 64: REC’s infrastructure loan sanctions for FY24

FY24- Infra loans sanctions

Private

24%

Others

Metro

Highways/Roads

38%

Hospitals

11%

Drinking water/

irrigation

12%

Source: MOFSL, Company

Infrastructure loans

The majority of the infra loans sanctioned by REC are directed towards government

and state projects, which account for over 75% of the total infra loans. However, it is

important to note that infrastructure loans to the private sector, which constituted

<4% of the sanction mix in FY23, increased to ~25% in FY25. The growing share of

infrastructure loans to the private sector may expose REC’s loan portfolio to higher

risks and might lead to elevated credit costs in the future.

Exhibit 65: REC’s annual disbursements to sanctions

Sanctions (INR b)

Disbursements (INR b)

Y-0 Disbursement of Y-1 sanction (%)

178%

75%

89%

65%

67%

64%

95%

41%

60%

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24

Source: MOFSL, Company; Data is as of Mar’24

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Disbursements for renewable generation project loans are typically back-ended,

implying that the majority of disbursements in such projects occur in the second or

third year following the initial loan sanction. REC reported robust growth in

renewable sanctions in FY23 and FY24. Considering the healthy growth in renewable

sanctions over the last two years, we anticipate strong growth in renewable

disbursements over FY25-26.

Exhibit 66: Renewable sanctions surged ~533% in FY24

Renewable sanctions (INR b)

YoY Growth (%)

533

Exhibit 67: Renewable sanctions to disbursements

Sanctions (INR b)

Disbursements (INR b)

Yo Disbursement of Y-1 sanction (%)

87%

74%

1,365

144

(14)

172

147

216

1,365

16%

172

FY21

147

216

FY23

FY24

129

160

FY21

FY22

FY23

FY24

FY22

Source: MOFSL, Company

Exhibit 68: Share of renewable in the sanction mix improved in FY24

Sanctions - Segment Mix (%)

FY23

FY24

Distribution

Infra

STL

Generation

Renewable

Transmission

Source: MOFSL, Company; Data is as of Mar’24

The primary mandate of REC has been to finance rural electrification projects across

India. This includes providing funding to state electricity boards, lending to state and

central power utilities, and supporting rural electricity cooperatives. As a result,

REC’s loan book was relatively more skewed towards T&D vs. its parent (PFC).

Given that, REC traditionally had a higher exposure to T&D, we believe that the

reform-based, result-linked power distribution sector scheme (covered extensively

earlier in this report) launched by the GoI has improved (albeit marginally) the

health of the distribution utilities and will benefit REC. This can potentially also lead

to demand in the generation and transmission segments.

Modernization of traditional thermal power plants and installation of FGD systems

in the existing and upcoming thermal power plants will also create lending

opportunities for REC. The company is also working closely with different state

governments for various lift irrigation projects.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 69: In its loan mix, REC has historically had a higher exposure to distribution (%)

Generation

FY19

FY20

FY21

Renewable Energy

Transmission

FY22

FY23

Distribution

FY24

Others

1QFY25

Source: MOFSL, Company

India had committed under the 2015 Paris agreement to reduce the greenhouse gas

emissions intensity by 33-35% below 2005 levels and to achieve 40% of installed

electric power capacity from non-fossil sources by 2030. In 2015, India embarked on

an ambitious plan of installing 500GW of renewable energy capacity by 2030.

Against this target, total renewable capacity at the end of Jun’24 was ~200GW.

Renewable energy now contributes only 8% to REC’s loan mix; however, we

expect this share to grow to ~25% over the next five years.

Exhibit 70: Exposure to private entities gradually increasing, perhaps because of higher

exposures in renewables and infrastructure

State (%)

17%

16%

Private (%)

17%

19%

83%

84%

83%

81%

FY19

FY20

FY21

FY22

FY23

FY24

1QFY25

Source: MOFSL, Company

2. NIM compression can be mitigated with benign credit costs

With a shift in segment mix in favor of renewables and infrastructure, we expect the

yield compression to continue. REC reported spreads of ~2.7% in FY24 and spreads

of 2.6% in FY25E are likely to be at a decadal low. We expect further moderation in

spreads for REC to ~2.5% by FY27, due to compression in yields led by a change in

segment mix and high competitive intensity from banks and other NBFC peers in this

segment.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 71: Intense competition and increase in renewables in the mix will lead to

compression in spreads

Yield on loans %

3.5

2.75

2.81

3.02

2.9

Cost of Funds %

Spread %

2.7

2.6

2.5

6.9

9.7

FY19

10.1

7.3

10.1

7.1

10.3

6.8

9.7

6.7

9.9

7.2

9.8

7.2

9.6

7.1

9.5

7.1

FY20

FY21

FY22

FY23

FY24

FY25E

FY26E

FY27E

Source: MOFSL, Company

Spreads may experience further compression due to the following factors: 1) banks

continuing to be aggressive and willing to finance high-quality operational power

projects; 2) lower spreads in renewable financing, which is characterized by intense

competition; and 3) a decline in repo (interest) rates, as a significant portion of the

asset side is linked to floating rates, while a large share of the liabilities, particularly

in the domestic debt market and foreign borrowings, are fixed rate in nature.

Exhibit 72: NIM likely to compress due to a moderation in the yields

4.4

3.7

NIM %

3.8

3.6

3.5

3.7

3.9

FY19

FY20

FY21

FY22

FY23

FY24

FY25E

FY26E

FY27E

Source: MOFSL, Company

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Our scenario analysis suggests that even if spreads were to moderate to ~2.2% over

the next two years, REC will still be able to deliver NIM of ~3.2% and RoA/RoE of

2.4%/19.3%. This combination of return profile complemented with dividend yields

of ~3.3% is by far better than many other PSU banks (which trade at marginally

lower valuations compared to REC).

Exhibit 73: Scenario analysis on spreads/margin assuming other things remain unchanged (%)

REC - Scenario Analysis

Yields

CoF

Spreads

Margin

RoA

RoE

Scenario 1

9.30

7.10

2.20

3.20

2.4

19.3

Scenario 2

9.40

7.10

2.30

3.30

2.5

19.9

Base Case

9.60

7.10

2.50

3.50

2.6

20.9

Source: MOFSL, Company

Under our base case, we estimate a yield of 9.6%, spreads of 2.5%, and a margin of

3.5% in FY26 for REC.

Exhibit 74: Expect cost ratios to remain stable at current levels

Cost to Income (%)

5.5

FY19

7.1

FY20

3.1

FY21

2.9

FY22

3.8

FY23

3.9

FY24

3.8

FY25E

3.8

FY26E

3.6

FY27E

Source: MOFSL, Company

REC can mitigate some of this spread/margin compression due to the levers it has

on credit costs, as we estimate credit costs to remain <5bp over FY25-27.

Exhibit 75: Negligible credit costs over FY25-FY27E

Credit Cost (%)

0.94

0.71

0.31

0.09

0.03

FY19

FY20

FY21

FY22

FY23

(0.29)

FY24

(0.05)

FY25E

(0.01)

FY26E

FY27E

Source: MOFSL, Company

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

3. Diversified liabilities; borrower preference for rupee term loans over

USD bonds

Similar to its parent PFC, REC is also rated AAA by various credit rating agencies. It

also extensively leverages foreign currency borrowings that are 99% hedged for all

such borrowings, which have a residual maturity of less than five years.

Exhibit 76: REC also has a fairly diversified borrowing mix (%)

Capital gains bonds

Foreign

FY19

Taxable Bonds

CPs

Banks and Fis

Tax free bonds + Infra bonds

FY23

1QFY25

FY20

FY21

FY22

FY24

Source: MOFSL, Company

Exhibit 77: Liability mix dominated by domestic NCDs (%)

Capital gains bonds

Taxable Bonds

Banks and Fis

Foreign

Tax free bonds + Infra bonds

Source: MOFSL, Company; Note: Data as of Jun’24

PFC and REC, which possess a quasi-sovereign status, have demonstrated a strong

correlation between their cost of borrowings (CoB) and government securities (G-

Sec) yields. Quite a few power generators issued USD bonds when borrowing in USD

was more cost-effective than borrowing in INR. As these maturing USD bonds are

refinanced with INR term loans, it will present an additional opportunity for loan

growth for REC.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

4. Stressed asset resolutions to continue; credit cost outlook remains

benign

Even though there is always an overarching risk associated with exposures to state

government entities, they have managed to maintain stability due to guarantees

from the state government and timely repayments just before they turn into NPAs.

Many of the erstwhile stressed exposures are now in advanced stages of resolution.

In our opinion, fresh slippages over the next two years would be far and few, as this

current power upcycle (driven by power shortages) will continue to foster

investments aimed at increasing both thermal and renewable generation capacities.

This should translate into an improvement in the headline asset quality and in the

provision coverage ratio.

Exhibit 78: Stressed asset resolutions have led to an improvement in asset quality

GNPA %

7.2

3.8

6.6

3.3

4.8 1.7

4.5 1.5

3.4 1.0

2.7 0.9

2.1 0.7

1.6 0.5

1.2 0.4

67.4

NNPA %

70.6

68.5

PCR %

68.0

66.0

FY19

FY20

FY21

FY22

FY23

FY24

FY25E

FY26E

FY27E

Source: MOFSL, Company

REC does not have any exposure to state-sector projects that have been classified as

NPAs. All the 16 projects that are classified as NPAs are from the private sector.

Resolutions in 12 NPA projects are being pursued under NCLT, and REC is trying to

achieve a resolution in the remaining four NPA projects outside the NCLT.

Exhibit 79: Resolutions of stressed exposures in the private sector to continue

Private GS3 (%)

Private NS3 (%)

Private PCR (%)

38 12

36 10

35 10

33 10

29 9

25 8

23 7

Source: MOFSL, Company

As the stressed exposures continue to get resolved, REC has gradually been reducing

the provision coverage on its Stage 3 loan assets, particularly on the 12 NPA projects

that are being resolved in NCLT.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 80: Healthy provision coverage on both NCLT and non-NCLT stressed exposures

Resolution Status

Under NCLT

Outside NCLT

Total Stage III

Resolution Status

Under NCLT

Outside NCLT

Total Stage III

PCR on Stage 3

Under NCLT

Outside NCLT

PCR on total Stage III

INR b

123

138

No. of projects

Source: MOFSL, Company

Exhibit 81: REC – A snapshot of NPA exposure along with expected recovery and current status of resolutions

Sr No.

Projects

State

Fuel

Outstanding

(INR b)

NCLT

Stage of

Resolution

Expected

Recovery

Comments

Rattan India Nasik

(Sinnar Thermal)

KSK Mahanadi

Maharashtra

Coal

(domestic)

Coal

(domestic)

23.30

NCLT

Admitted in NCLT



EOI Last date was 20th July



Made provision of 50%.

The project is expected to

get resolved before year

end.

No substantial write back

expected as company has

made provision of around

~60%.

Prospective applicants list

received. Stay order on

the IBC process as of now.

Last plan was submitted in

August. Expected to be

completed by year end

Chhattisgarh

26.00

NCLT

Bids have come

115%



Lanco

Amarkantak

IPCL

Haldia

Shri Maaheshwar

Hydel

Chhattisgarh

Coal

(domestic)

Imported

coal

Hydel Power

22.14

NCLT

Resolved in

2QFY25

37-38%

West Bengal

Madhya

Pradesh

13.47

NCLT / Under IBC - Not

IBC in advanced Stage

NCLT

Advanced stages

of resolution



2.50

TRN Energy

Chhattisgarh

Coal

(domestic)

15.00

Under

Outside Restructuring-

NCLT Advanced Stage

of Resolution

Advanced Stage

of Resolution



Restructuring Proposal -

Rating Process is ongoing.



Resolution plan from

Bhadreshwar

Gujarat

Nagai Power

Konaseema

Jas Infra (coal)

Ind Barath Madras

Corporate Power

Lanco Vidharba

Coal

Tamil Nadu (domestic)

Andhra

Coal

Pradesh

(domestic)

Coal

Bihar

(domestic)

Thermal

Tamil Nadu

Power

Coal

Jharkhand (domestic)

Coal

Maharashtra (domestic)

Coal

(domestic)

10.00

5.61

2.22

0.33

4.16

7.97

5.00

NCLT

Resolved

Under liquidation

Source: MOFSL, Company

Jindal Power received.

Reverse bidding process is

going on.



Resolved in 2QFY25

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 82: REC – Stressed loan projects that are in liquidation

Corporate

Konaseema

Jas Infra (coal)

Ind Barath Madras

Corporate Power

Lanco Vidharba

Outstanding amount

(INR b)

2.22

0.33

4.16

7.97

5.00

Details

The project is under liquidation

Source: MOFSL, Company

Exhibit 83: REC – Stressed loan projects that are resolved.

Name of the borrower

Meenakshi Energy Private Limited

Dans Energy Private Limited

Classic Global Securities Limited

Meenakshi Energy Private Limited

South-East UP Transmission Company Limited

Jhabua Power Limited

Ind Barath Energy (Utkal) Limited

Gati Infrastructure Private Limited

ATN International Limited

Silicon Valley Infotech Limited

Essar Power (MP) Limited

Amrit Jal Ventures Private Limited

VS Lignite Power Private Limited

Essar Power Transmission Company Limited

Facor Power Limited

RKM Powergen Private Limited

REC’s

exposure

(INR b)

Remarks

Resolved under IBC

Resolved through Restructuring

Resolved through OTS outside IBC

Resolved under IBC

Overdue has been fully paid by the company

Resolved through OTS outside IBC

Resolved under IBC

Resolved outside IBC by implementation of Restructuring Plan

Resolved under IBC

Resolved outside IBC by implementation of Restructuring Plan

Year of

Resolution

FY24

FY23

FY22

FY21

Source: MOFSL, Company

Stressed project resolutions are driven by the power shortages and the consequent

power upcycle. As of Jun’24, REC’s Gross Stage 3 stood at 2.6%, down from its peak

of 7.2% in Mar’19. We believe that the provision coverage on the stage 3 loans is

adequate. Moreover, on the 12 projects that are being resolved under NCLT, REC

carries a PCR of 71%, while on the four projects that are being resolved outside

NCLT, it carries a PCR of 49%. With total PCR on its Stage 3 loans at ~69%, its Net

Stage 3 has declined to ~0.8% as of Jun’24.

With multiple such large stressed exposures in advanced stages of resolution and

high provision coverage on these loans, we anticipate a reversal of provisions,

resulting in provision write-backs. This trend is expected to keep credit costs at a

benign level of less than 5bp over FY25-27E.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 84: Expect credit costs to remain benign over FY25-FY27

Credit Cost (%)

0.94

0.71

0.31

0.09

0.03

FY19

FY20

FY21

FY22

FY23

(0.29)

FY24

(0.05)

FY25E

(0.01)

FY26E

FY27E

Source: MOFSL, Company

5. Healthy earnings growth trajectory; RoE of ~21% over FY25-27E

With high confidence in the sustainability of this power upcycle (because of reasons

elaborated in detail earlier in this report), we attach a very low probability to new

NPA formation and ascribe a high probability to continued resolutions in the

stressed private sector assets. In the absence of any new NPA formation, the credit

costs will remain benign in the foreseeable future.

Given the aspirations of India to achieve the energy transition and the investments

in power generation (both conventional and renewable) to support the power

demand, we believe that the strong loan growth for REC will sustain. Despite

marginal NIM compression, we estimate REC will deliver a PAT CAGR of ~15% over

FY24-FY27.

REC delivered an RoA/RoE of ~2.8%/22.0% in FY24, which was its best performance in

the last six years. We expect REC to clock a RoE of ~21% over each of FY25-27E.

Exhibit 85: PAT CAGR of ~15% over FY24-27

PAT (INR b)

14.1

YoY Growth (%)

21.2

21.1

Exhibit 86: Healthy RoA/RoE of ~2.6%/21.0% in FY27

RoA

20.3

22.2

RoE

21.3

20.9

20.7

(15)

1.5

FY20

FY21

FY22

FY23

FY24 FY25E FY26E FY27E

Source: MOFSL, Company

FY20

2.2

FY21

2.5

FY22

2.5

FY23

2.8

FY24

2.7

2.6

FY25E FY26E FY27E

Source: MOFSL, Company

Back in May’16, the GoI mandated every CPSE to pay a minimum annual dividend

that was higher of either 30% of PAT or 5% of the net worth. This was subject to the

maximum dividend allowed to be paid out under the extant legal provisions.

estimate a DPS of INR23.5/share and a dividend yield of ~4.5% in FY27E for REC.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Exhibit 87: Healthy dividend payout…

Dividend per share (INR)

20.5

18.0

23.5

Exhibit 88: …driven by a dividend policy that is higher of

either 30% of PAT or 5% of the net worth

Dividend Payout (%)

% to net worth

15.3

11.0

12.7

12.6

16.0

6.3

6.2

5.7

5.9

5.8

6.1

5.9

5.7

5.6

FY19 FY20 FY21 FY22 FY23 FY24 FY25E FY26E FY27E

Source: MOFSL, Company

FY19 FY20 FY21 FY22 FY23 FY24 FY25E FY26E FY27E

Source: MOFSL, Company

Exhibit 89: Dividend yields of ~3-5% over the next three years are attractive

Dividend Yield (%)

4.1

3.6

4.7

3.1

2.2

2.5

3.2

FY19

FY20

FY21

FY22

FY23

FY24

FY25E

FY26E

FY27E

Source: MOFSL, Company

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

REC: Valuation and View

We believe that given the niche nature of power financing and the fact that REC and

PFC are the nodal implementation agencies for the power reforms initiated by the

government, REC will continue to maintain its relevance. Moreover, with emerging

opportunities in renewable energy, electric vehicles, charging infrastructure,

modernization of the existing thermal power plants, FGD installations, and smart

metering, we believe that REC will be able to demonstrate steady loan growth while

mitigating risks associated with asset quality.

REC is projected to deliver an earnings CAGR of ~15% over FY24-FY27, with an RoA/

RoE of 2.6%/21.0% and a dividend yield of ~4.1% in FY26. The stock trades at 1.4x

FY26E P/ABV and we believe that the risk-rewards are attractive given the strong

visibility on its earnings trajectory. Moreover, REC’s stock price has corrected by

~25% from its recent highs, and now even provides a margin of safety in valuations.

We initiate coverage on REC with a BUY rating and a TP of INR630

(premised on a

target multiple of 1.6x Sep’26E P/ABV).

Power financiers, namely REC and PFC, are both favored options to capitalize on the

current power upcycle. Both of these lenders are poised to capture a significant share

of the power financing opportunities in India over the next five years. However, they

must remain cautious and avoid becoming overly ambitious regarding their target

opportunities. We would appreciate if PFC and REC exercise prudence and refrain

from investing in merchant plants (without Power Purchase Agreements), limit their

exposure to private sector projects, and expand in a measured manner within

infrastructure and logistics, areas that are not their core expertise.

While we have a BUY rating on both PFC and REC, we prefer REC over PFC because

of its better execution and stronger RoE profile.

Exhibit 90: REC - One-year forward P/E

13.0

10.0

7.0

4.0

1.0

P/E (x)

Min (x)

Avg (x)

+1SD

Max (x)

-1SD

Exhibit 91: REC - One-year forward P/B

2.3

1.8

P/B (x)

Min (x)

Avg (x)

+1SD

Max (x)

-1SD

10.2

2.0

5.5

3.6

1.8

1.5

7.6

1.3

0.8

0.3

1.0

0.7

1.5

Source: MOFSL, Company

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

REC: Key risks



Increase in exposure to projects without PPA:

Lending to power projects

without PPAs was a significant reason for financial strain in the past. While

power sector lenders have since made PPAs a prerequisite for loan disbursal,

there are still concerns about renewed exposure to projects lacking these PPAs.

High-risk areas include: merchant renewable plants, where NBFCs have started

partial lending without PPAs; pumped storage plants (PSPs), which require

significant capital before securing PPAs; and green hydrogen projects, which

lack a defined PPA structure and have high capex requirements.

Expanding exposure to private infrastructure loans:

Until recently, REC

primarily extended loans to government entities in the infrastructure sector,

with minimal exposure to private firms. However, any future increase in lending

to private infrastructure or industrial projects could pose significant risks.

Private loans (particularly those towards promoters) fall outside the core

expertise of REC.

The RBI's draft stricter provisioning norms on project financing:

The RBI has

proposed stricter lending norms for project financing, increasing provisioning

requirements from 0.4% to 5%, with gradual reductions to 2.5% and 1% as

projects become operational, subject to conditions. These changes apply across

infrastructure, non-infrastructure, and commercial real estate projects for

regulated financial entities. Additional guidelines, such as a minimum 10%

exposure for consortium lending, are also included. While we attach a low

probability to these draft guidelines on project financing being implemented in

its current form, it still remains a risk to the overall sector.

Compression in spreads and margins:

We have previously emphasized that

current yields are clearly unsustainable, based on the following factors: 1) as the

financial health of the state DISCOMs improves, they will expect REC to extend

loans to them at interest rates that are comparable to the state government

bond yields; 2) with low systemic credit growth, banks will seek to selectively

refinance operational and high-quality power projects of REC; and 3) the

increasing proportion of renewables, which is a highly competitive segment with

relatively lower spreads.

Asset quality stress due to any further deterioration in the health of private

power projects or DISCOMS:

Although the government has implemented

numerous reforms in the power sector that could potentially enhance its overall

health, we cannot entirely dismiss the possibility of adverse effects on

provisioning and credit costs. This could arise from slippages in some large

private sector accounts and the adverse effect on interest income resulting from

any government bailouts provided to DISCOMs.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

REC: ESG initiatives



In FY24, REC has sanctioned 82 renewable energy projects with installed

generation capacity aggregating to 17,465MW, with total loan assistance of

INR1.4t.

As of Mar’24, the company had 78 permanent women employees, which

represented 15% of the total work force. A women’s cell has been in operation

to look after the welfare and all-round development of the women employees.

The company spent a total amount of ~INR2.5b during the year towards various

CSR projects.

REC’s Board comprises eight directors, including four independent directors and

one woman director.

REC has set up a Risk Management Committee (RMC) of its directors in place for

monitoring the integrated risks of the company. Further, as required under the

RBI norms, the Board has appointed a Chief Risk Officer (CRO).

REC’s contribution for Clean Energy Projects

Note: 43GW is based on sanctions. Source: Company, MOFSL

REC’s Environmental Stewardship: Areas of Focus

Source: Company, MOFSL

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

About REC



REC is a leading NBFC categorized as an infrastructure finance company by the

RBI, servicing the financing needs of the entire power sector value chain. REC

advances financial assistance to the power sector in all segments, viz.,

generation (both conventional and renewable energy), and T&D.

REC’s principal products are interest-bearing loans to state utilities and private-

sector borrowers. REC has contributed successfully to the development of

power infrastructure in the country, right from its inception in 1969.

REC has been appointed as a nodal agency for GoI’s flagship schemes, viz.,

Pradhan Mantri Sahaj Bijli Har Ghar Yojana (SAUBHAGAYA), Deen Dayal

Upadhaya Gram Jyoti Yojana (DDUGJY), and National Electricity Fund (NEF).

Further, along with PFC, REC has also been designated as the Nodal Agency for

Revamped Distribution Sector Scheme (RDSS).

In addition, REC assists the Ministry of Power in monitoring the Ujjwal Discom

Assurance Yojana (UDAY), which seeks to operationally reform and financially

turnaround the power distribution companies of the country.

REC is currently led by Mr. Vivek Kumar Devangan, IAS, Chairman and

Managing Director. REC is usually led by Secretary-level IAS officers.

Markets served

REC operates in the Indian market and has a presence across the entire country. To

mobilize resources, the company also taps international capital markets in addition

to domestic markets.

Exhibit 92: Shareholding pattern (%)

PFC

Corporates

MFs

Individual

Insurance

FPI

Source: MOFSL, Company; Note: Data as of Jun’24

Exhibit 93: Top 10 shareholders

Sr. No.

Particulars

Power Finance Corporation

Blackrock

Vanguard Group

HDFC Asset Management

Nippon Life India Asset Management

Dimensional Fund Advisors LP

Life Insurance Corporation of India

Republic of Singapore

Axis Asset Management

SBI Funds Management

Shareholding

52.63

2.04

1.96

1.44

1.15

1.10

1.07

1.02

0.70

0.59

Source: MOFSL, Bloomberg; Data as of 07 Oct’24

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

REC: Bull and Bear cases

Bull case

In our bull case, we assume ~21% AUM CAGR, driven by a ~27% disbursement

CAGR over FY24-FY27E.



We expect spreads and margins to remain largely stable at ~2.6% and 3.5%,

respectively, by FY27.



We estimate NII and PPOP CAGR of ~20% each, over FY24-27 on account of

strong loan growth and the company’s ability to deliver operating efficiencies.



We estimate cost ratios to improve over the next three years. We expect

negligible credit cost, leading to a PAT CAGR of ~18% over FY24-FY27.



Bear case



In our bear case, we assume ~13% AUM CAGR over FY24-FY27.

We expect spreads to decline ~25bp and NIM to contract ~15bp by FY27.

We estimate NII and PPOP CAGR of ~12% and 13%, respectively, over FY24-27.

We project average credit costs of ~2-5bp to drive PAT CAGR of ~5% over FY24-

FY27.

Exhibit 2: REC: Bear case scenario

FY25E

60,99,409

3.6

1,96,761

1,97,678

(7,526)

2,05,204

1,64,163

2.7

21.9

308

FY26E

FY27E

INR m

AUM

YoY Growth (%)

NIM (%)

NII

PPoP

Credit Costs

PBT

PAT

Growth (%)

RoA (%)

RoE (%)

BV (INR)

REC Target Multiple (Sep'26E)

REC Target Price (INR)

Downside (%)

FY25E

FY26E

FY27E

73,59,794 89,35,727

3.6

2,36,568

2,38,410

(2,764)

2,41,174

1,92,939

2.7

21.9

363

3.5

2,84,652

2,87,163

2,362

2,84,801

2,27,841

2.6

21.9

429

1.8

725

45%

Source: MOFSL, Company

58,38,570 66,01,207 73,91,216

3.5

1,86,756

1,87,674

(1,633)

1,89,307

1,51,446

2.6

20.4

303

3.4

2,09,487

2,11,329

23,742

1,87,587

1,50,069

-1

2.3

17.7

342

3.4

2,33,772

2,36,283

33,026

2,03,257

1,62,605

2.2

17.0

386

1.1

400

-20%

Source: MOFSL, Company

Exhibit 1: REC: Bull case scenario

INR m

AUM

YoY Growth (%)

NIM (%)

NII

PPoP

Credit Costs

PBT

PAT

Growth (%)

RoA (%)

RoE (%)

BV (INR)

REC Target Multiple (Sep'26E)

REC Target Price (INR)

Upside (%)

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

REC: SWOT analysis



Improving asset

quality with GS3 of

<2.7% and NS3 of <1%.

Healthy sanction

pipeline will help the

company achieve

strong loan growth.



Expanding exposure

to private

infrastructure

projects raises risks

as these loans fall

outside REC’s core

business of lending to

power projects.

Increasing exposure

to high risk power

projects without

PPAs such as

merchant RE plants,

pumped storage, and

green hydrogen

projects.



Significant

acceleration in

Investments in

renewable energy

will help the

company increase

disbursements.

The National

Infrastructure

Pipeline presents

opportunity of

~INR35t across

electricity generation

and T&D, which will

lead to strong loan

growth of ~18% over

FY24-27.



Increasing

competitiveness

through active

participation by

banks in renewable

financing might lead

to margin

compression.

The RBI’s draft

circular on increasing

provisioning

requirement from

~0.4% to ~5.0%,

which would be

gradually brought

down subject to

conditions.



October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

REC: Board of Directors

Shri Vivek Kumar Dewangan

Chairman and MD

Shri Vivek Kumar Dewangan is the Chairman

& Managing Director of REC Limited since 17

May’22. He is an IAS officer (Manipur: 1993)

and holds a degree in B.E. (Electronics) from

NIT, Bhopal, and P.G. in Optoelectronics &

Optical Communication from IIT, Delhi. Prior

to joining REC, he was Additional Secretary in

the Ministry of Power, Government of India.

Shri Vijay Kumar Singh

Director (Projects)

Shri Vijay Kumar Singh is the Director

(Projects) of REC Limited since 15 Jul’22.

Prior to his elevation, he was serving as an

Executive Director in the company. He holds a

Bachelor’s Degree in Electrical Engineering

from IIT, Roorkee, and has over 35 years of

experience in the Indian power sector.

Shri Harsh Baweja

Director (Finance)

Shri Harsh Baweja is Director (Finance) of REC

Limited since 14 May’24. With a wealth of

experience spanning over three decades, his

previous role as Executive Director (Finance)

at REC showcased his adeptness in leading

both state and private sector financing,

showcasing exceptional acumen in managing

diverse business verticals and financial

portfolios.

Shri Manoj Sharma

Nominee Director of PFC

Shri Manoj Sharma is a Chartered Accountant

with a degree in law (LLB). He joined PFC in

1990 and was working as Executive Director

(In charge) of Commercial Division before

assuming charge as Director (Commercial),

PFC. He has more than 30 years of experience

in the power sector.

Shri Shashank Misra

Director (Govt. Nominee)

Shri Shashank Misra is an IAS officer and

holds a B. Tech degree in Electrical

Engineering from IIT Delhi. Presently, he is

posted as Joint Secretory in the Ministry of

Power, Government of India. Prior to joining

in the Ministry of Power, he served in the

Dept. of Revenue, Ministry of Finance.

Dr. Gambheer Singh

Part Time Non-official Independent Director

Professor Dr. Gambheer Singh has been

appointed as a Part-time Non-official

Independent Director on the Board of REC

Limited w.e.f. 15 Nov’21. He is an MBBS from

Gandhi Medical College, Bhopal and Master of

Surgery from G.R. Medical College, Gwalior.

Dr. Manoj Manohar Pande

Part Time Non-official Independent

Director

Dr. Manoj Manohar Pande has been

appointed as Part-time non-official

Independent Director on the Board of REC

Limited with effect from November 15, 2021.

He is currently working as a family physician

and social worker in Yavatmal, Maharashtra.

He is also at the helm of two NGOs, dedicated

for the betterment of society since past 16

years.

Dr. Durgesh Nandini

Part time Non-official Independent

Director

Dr. Durgesh Nandini has been appointed as

Part-time Non-official Independent Director

on the Board of REC Limited with effect from

Dec’30, 2021. She holds a Master Degree in

Arts from Gorakhpur University, Masters in

Education from Maharshi Dayanand

University, Rohtak and a doctorate degree in

Political Science from Dr. B.R. Ambedkar

Shri Narayanan Thirupathy

Part time Non official Independent

Director

Shri Narayanan Thirupathy has been

appointed as a Part-time non-official

Independent Director on the Board of REC

Limited w.e.f. 6 Mar’23. He holds a

Bachelor’s degree in Economics from the

University of Madras. He is a popular

television debater and social worker from

Tamil Nadu.

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

REC: Financials and valuations

REC: Income Statement

Y/E March

Interest on Loans

Interest Exp and Other Charges

Net Interest Income

Change (%)

Forex Gains/(Losses)

Net Interest Income

(including forex gains/losses)

Other Operating Income

Other Income

Net Total Income

Change (%)

Employee Cost

Administrative Exp

Depreciation

Total Operating Expenses

PPoP

Change (%)

Total Provisions

% to Operating Income

PBT

Tax (Incl Deferred tax)

Tax Rate (%)

PAT

Change (%)

REC: Balance Sheet

Y/E March

Capital

Reserves & Surplus

Net Worth

Borrowings

Change (%)

Total Liabilities

Investments

Change (%)

Loans

Change (%)

Net Fixed Assets

Net current assets

Total Assets

E: MOFSL Estimates

FY19

250

156

6.6

-5

3.4

2.0

2.9

28.8

30.4

FY20

297

190

107

14.3

-24

-4.0

-5.6

11.3

30.0

-15.2

FY21

347

215

132

23.7

-3

129

136

60.4

132

67.4

18.4

108

22.3

71.1

FY22

382

221

161

22.3

-8

153

164

20.5

159

20.7

21.8

124

19.1

100

20.1

FY23

388

237

151

-6.4

-11

140

144

-12.1

139

-12.9

0.8

137

19.5

111

10.0

FY24

464

299

165

9.0

-2

163

171

18.6

164

18.5

-14

-8.3

178

21.2

140

26.8

FY25E

542

347

196

18.8

-2

194

204

19.5

196

19.6

-3

-1.3

199

20.0

159

13.6

FY26E

629

403

226

15.6

-2

225

237

15.9

228

16.0

-0.1

228

20.0

183

14.7

(INR b)

FY27E

738

474

264

16.7

-2

262

276

16.7

266

16.8

0.9

264

20.0

211

15.6

(INR b)

FY27E

1,071

1,097

7,310

19.2

8,407

15.0

8,261

19.1

8,367

FY19

323

343

2,395

13.5

2,738

-6.9

2,705

12.9

2,732

FY20

331

351

2,815

17.5

3,166

-3.5

3,121

15.4

3,148

FY21

418

438

3,228

14.7

3,666

-17.4

3,653

17.0

3,678

FY22

493

513

3,263

1.1

3,776

13.0

3,719

1.8

3,747

FY23

550

577

3,808

16.7

4,385

45.4

4,221

13.5

4,259

FY24

661

688

4,456

17.0

5,144

69.5

4,992

18.3

5,052

FY25E

779

805

5,210

16.9

6,015

35.0

5,878

17.7

5,956

FY26E

914

940

6,135

17.7

7,075

20.0

6,936

18.0

7,029

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

REC: Financials and valuations

REC: Loans and Disbursements

Gross Loans (INR b)

YoY Growth (%)

Disbursements (INR b)

YoY Growth (%)

REC: Ratios

Y/E March

Spreads Analysis (%)

Avg. Yield - on Financing Portfolio

Avg Cost of Funds

Interest Spread

Net Interest Margin

Profitability Ratios (%)

RoE

RoA

Efficiency Ratios (%)

Int. Expended/Int. Earned

Other operating Inc./Net

Income

Other Income/Net Income

Op. Exps./Net Income

Empl. Cost/Op. Exps.

Asset-Liability Profile (%)

Loans/Borrowings Ratio

Assets/Networth

Debt/Equity Ratio

Asset Quality (%)

Gross Stage 3

Net Stage 3

PCR

Credit costs

Valuations

Book Value (INR)

BV Growth (%)

Price-BV (x)

Adjusted Book Value (INR)

ABV Growth (%)

Price-ABV (x)

EPS (INR)

EPS Growth (%)

Price-Earnings (x)

Dividend

Dividend Yield (%)

E: MOFSL Estimates

FY19

2,812

722

FY20

3,224

757

FY21

3,774

930

FY22

3,854

642

-31

FY23

4,350

968

FY24

5,094

1,615

FY25E

6,003

2,131

FY26E

7,059

2,558

FY27E

8,383

3,018

FY19

9.7

6.9

2.8

3.7

FY20

10.1

7.3

2.8

3.7

FY21

10.1

7.1

3.0

3.9

FY22

10.3

6.8

3.5

4.4

FY23

9.7

6.7

2.9

3.8

FY24

9.9

7.2

2.7

3.6

FY25E

9.8

7.2

2.6

3.6

FY26E

9.6

7.1

2.5

3.5

FY27E

9.5

7.1

2.5

3.5

17.0

2.1

14.1

1.5

21.2

2.2

21.1

2.5

20.3

2.5

22.2

2.8

21.3

2.7

20.9

2.6

20.7

2.6

62.6

-0.1

0.4

5.5

32.2

64.0

1.2

0.8

7.1

29.2

62.0

5.2

0.2

3.1

34.9

57.8

5.8

0.6

2.9

33.1

61.1

2.6

0.3

3.8

33.2

64.5

4.2

0.4

3.9

32.4

63.9

4.6

0.4

3.8

31.8

64.1

4.7

0.4

3.8

31.8

64.3

4.7

0.4

3.6

32.0

112.9

8.0

7.0

110.9

9.0

8.0

113.1

8.4

7.4

114.0

7.3

6.4

110.8

7.4

6.6

112.0

7.3

6.5

112.8

7.4

6.5

113.1

7.5

6.5

113.0

7.6

6.7

7.2

3.8

47.7

0.1

6.6

3.3

49.6

0.3

4.8

1.7

64.6

0.7

4.5

1.5

67.4

0.9

3.4

1.0

70.6

0.0

2.7

0.9

68.5

-0.3

2.1

0.7

68.0

0.0

1.6

0.5

68.0

0.0

1.2

0.4

66.0

0.0

174

2.8

2.9

160

1.4

3.1

29.2

30.4

17.1

11.0

2.2

178

2.3

2.8

164

2.4

3.0

24.7

-15.2

20.2

11.0

2.2

222

24.8

2.3

213

30.1

2.3

42.3

71.1

11.8

12.7

2.5

260

17.3

1.9

253

18.4

2.0

50.9

20.1

9.8

15.3

3.1

219

-15.7

2.3

215

-15.0

2.3

42.0

-17.5

11.9

12.6

2.5

261

19.3

1.9

257

19.6

1.9

53.2

26.8

9.4

16.0

3.2

306

17.0

1.6

302

17.4

1.7

60.5

13.6

8.3

18.0

3.6

357

16.8

1.4

354

17.1

1.4

69.3

14.7

7.2

20.5

4.1

417

16.7

1.2

413

16.9

1.2

80.1

15.6

6.2

23.5

4.7

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

REC: Du Pont Analysis %

Interest income

Interest expenses

Net Interest Income

Other Operating Income

Other Income

Total Income

Operating expenses

Operating profits

Provisions

PBT

Taxation

RoA

Leverage (x)

RoE

FY19

9.2

5.8

3.4

-0.2

0.0

3.3

0.2

3.1

0.1

3.0

0.9

2.1

8.0

17.0

FY20

9.2

5.9

3.3

-0.7

0.0

2.6

0.2

2.4

0.3

2.2

0.7

1.5

9.3

14.1

FY21

9.3

5.8

3.5

0.1

0.0

3.6

0.1

3.5

0.6

2.9

0.6

2.2

9.5

21.2

FY22

9.4

5.4

4.0

0.0

4.0

0.1

3.9

0.9

3.1

0.6

2.5

8.5

21.1

FY23

8.9

5.4

3.4

-0.2

0.0

3.3

0.1

3.2

0.0

3.1

0.6

2.5

8.0

20.3

FY24

9.2

5.9

3.3

0.1

0.0

3.4

0.1

3.2

-0.3

3.5

0.7

2.8

8.0

22.2

FY25E

9.1

5.8

3.3

0.1

0.0

3.4

0.1

3.3

0.0

3.4

0.7

2.7

8.0

21.3

FY26E

9.0

5.8

3.3

0.1

0.0

3.4

0.1

3.3

0.0

3.3

0.7

2.6

8.0

20.9

FY27E

9.0

5.8

3.2

0.1

0.0

3.4

0.1

3.3

0.0

3.2

0.6

2.6

8.0

20.7

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

NOTES

October 2024

REPORT GALLERY

RECENT STRATEGY/THEMATIC REPORTS

May 2024

Gautam Duggad – Research Analyst

(Gautam.Duggad@MotilalOswal.com)

Research Analyst: Deven Mistry

(Deven@MotilalOswal.com)

Aanshul Agarawal

(Aanshul.Agarawal@Motilaloswal.com)

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

Expected return (over 12-month)

>=15%

< - 10%

< - 10 % to 15%

Rating may undergo a change

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall be within following 30 days take

appropriate measures to make the recommendation consistent with the investment rating legend.

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********************************************************************************************************************************

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inherent conflict of interest in some of the stocks mentioned in the research report.

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October 2024

Power Financiers - Thematic: The Power Play: Key to India’s energy transition

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October 2024