Whalesbook
Although Power Finance Corporation (PFC) reported a headline profit increase, its fourth-quarter results showed underlying financial pressures. Revenues fell, and key profit measures like net interest income declined significantly. These findings come as PFC aims to merge with REC Ltd by April 1, 2027, a plan now facing greater scrutiny amid changing regulations.
Merger Plans Amid Financial Pressure
PFC and REC are moving forward with their consolidation, intending to create a major single financing platform for India's power sector. Boards have given initial approval and appointed advisors. However, the financial results for the quarter ending March 31, 2026, present a mixed picture. While consolidated net profit rose 3% year-on-year to ₹8,597.61 crore, this occurred alongside a decline in total income to ₹28,856.60 crore from ₹29,285.45 crore last year. More concerning is the 11% year-on-year drop in net interest income to ₹10,833 crore, a key indicator of a lender's main profitability. PFC Chairman and Managing Director Parminder Chopra noted that borrower prepayments due to lower interest rates partly constrained profits and limited loan book growth. Despite expecting no further rate cuts by the Reserve Bank of India in FY27, the company plans a 10% loan book expansion in FY27, intending to borrow ₹1.6 lakh crore.
RBI's New NBFC Rules Pose Regulatory Hurdles
A significant concern for PFC and REC is the Reserve Bank of India's (RBI) proposed rules for top-tier Non-Banking Financial Companies (NBFCs). The RBI is shifting to an asset size criterion, with companies having over ₹1 lakh crore in assets classified as top-tier. Both PFC and REC, with market capitalizations of approximately ₹1.47 trillion and ₹907 billion respectively, meet this threshold. This proposed reclassification, moving state-owned NBFCs into a stricter regulatory category, could potentially narrow the valuation gap with private lenders. However, PFC has formally asked the RBI about proposed limits on group exposure falling from 50% to 35%. While capital is strong, these changes could have other implications, and PFC fears being moved from its current status under the draft framework. This would bring these companies under oversight similar to banks, improving transparency and potentially reducing broader risks.
Currency Losses and Borrowing Plans
The company also recorded losses of around ₹1,500 crore for the full year from market value changes and transactions due to currency shifts on foreign loans, worsened by the West Asia crisis. Although nearly 97% of its foreign currency loans are hedged, limiting wider risks, currency volatility is a concern. PFC plans to borrow ₹1.6 lakh crore in FY27 to fund its targeted loan growth, though borrowing strategies are not yet disclosed amid ongoing geopolitical volatility.
Analyst Concerns and Merger Risks
The merger timeline for PFC and REC, set for April 1, 2027, appears precarious due to integration challenges and looming regulatory changes. The RBI's move to classify NBFCs by asset size, while potentially good for governance and valuation long-term, creates significant short-term uncertainty. PFC's concerns over reduced group exposure limits show potential operational issues. Furthermore, recent technical analysis downgraded REC Ltd to 'Sell' citing a worsening outlook and market underperformance. This contrasts with some analyst reports suggesting 'Buy' or 'Strong Buy' ratings for both entities with potential upside. However, one report indicates a 'Sell' consensus for PFC based on 57 analysts, showing market views differ, warranting caution. The reported decline in net interest income and revenue, along with currency pressures, suggests profitability may stay under pressure, possibly delaying or complicating the merger's expected benefits. Higher provisions for project finance, such as a 5% charge when projects begin, could also affect capital ratios.
Stock Performance and Sector Outlook
As of May 13, 2026, PFC shares closed at ₹440.70, with REC Ltd trading 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 look attractive compared to some peers like LIC Housing Finance (5.4x) and PTC India Financial Services (6.0x), but are similar to or lower than some other banks and NBFCs. The Indian power sector is set for growth, with demand expected to rise 4-5% in FY27 and a 5-6% compound annual growth rate projected. The NBFC sector is also expanding, though growth is slowing. PFC shares surged about 22% in April 2026, while REC shares fell over 16% in the past year, showing different market views.
Future Outlook for PFC and REC
Both PFC and REC face a dynamic future shaped by their merger, borrowing plans, and changing regulations. Merger success depends on internal execution and navigating RBI rules and currency risks. While sector growth prospects remain positive, the companies must address margin pressures and capital needs to fully benefit from consolidation.