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Power Finance Corporation (PFC) announced a 3% rise in net profit for the fourth quarter, reaching ₹8,597.61 crore. However, this profit growth occurred alongside a sequential drop in total income to ₹28,856.60 crore and an 11% year-on-year decrease in its crucial net interest income to ₹10,833 crore. These financial results come as PFC and REC Ltd aim to complete their merger by April 1, 2027, a process now facing closer examination due to evolving regulatory conditions.
Profit Up, But Income Falls
PFC's board has approved the merger in principle with REC Ltd, appointing advisors to create a consolidated financing entity for India's power sector. Despite the headline profit increase, PFC's revenue declined sequentially from ₹29,285.45 crore last year. PFC Chairman and Managing Director Parminder Chopra explained that borrower prepayments, driven by lower interest rates, partly constrained profits and limited loan book growth. The company aims for a 10% loan book expansion in FY27, with plans to borrow ₹1.6 lakh crore, even as it anticipates no further rate cuts from the Reserve Bank of India.
Merger Faces Regulatory Hurdles
A significant challenge for the planned PFC-REC merger is the Reserve Bank of India's (RBI) proposed new framework for upper-layer Non-Banking Financial Companies (NBFCs). The RBI is shifting to a criterion based on asset size, classifying entities with assets over ₹1 lakh crore into the upper layer. Both PFC and REC, with market capitalizations of roughly ₹1.47 trillion and ₹907 billion respectively, comfortably meet this threshold. This potential reclassification of government-owned NBFCs into a more stringent regulatory category could lead to similar valuations with private sector firms. However, PFC has formally expressed concerns to the RBI about proposed reductions in group exposure limits from 50% to 35%. While capital adequacy remains strong, these potential changes could have implications, and PFC is concerned about being reclassified from its current status. This move would bring these entities under oversight similar to banks, aiming to boost transparency and reduce broader financial system risk.
Currency Losses and Borrowing Plans
Currency fluctuations linked to foreign borrowings caused accounting losses of about ₹1,500 crore for the full year, worsened by the West Asia crisis. Although nearly 97% of PFC's foreign currency borrowings are hedged, exchange rate volatility remains a concern. PFC plans to borrow ₹1.6 lakh crore in FY27 to fund its targeted loan growth.
Analyst Views Diverge on PFC and REC
The April 1, 2027 merger timeline faces uncertainty due to integration complexities and upcoming regulatory changes. PFC's concerns over reduced group exposure limits highlight potential operational issues. Recent technical analysis has downgraded REC Ltd to a 'Sell' rating due to a weakening outlook and underperformance compared to the market. This contrasts with some analyst reports suggesting 'Buy' or 'Strong Buy' consensus for both entities. However, one report indicates a 'Sell' consensus for PFC based on 57 analysts over three months, showing a divergence in market sentiment that warrants caution. Increased provisioning for project financing, a 5% charge at commencement, could also affect capital ratios.
Valuations and Sector Growth
As of May 13, 2026, PFC shares closed at ₹440.70 and REC Ltd at ₹344.50. PFC's P/E ratio is around 5.83 to 6.39, while REC's is approximately 5.56 to 5.81. These valuations appear attractive against peers like LIC Housing Finance (5.4x) and PTC India Financial Services (6.0x), but align with or lag some other banks and NBFCs. India's power sector is expected to grow, with demand rising 4-5% in FY27 and a projected annual growth rate of 5-6%. The NBFC sector is expanding, though its growth pace is slowing. PFC's stock surged about 22% in April 2026, while REC's stock fell over 16% in the past year, showing different market views.
The integration challenges, regulatory shifts, and fluctuating profitability pressures will be key factors as PFC and REC move towards their merger, even as the broader sector shows growth potential.