ICICI Securities: Power Finance Corporation BUY Call Maintained, Revised Target Price Revealed! What Investors Need to Know Now.

ICICI Securities has released a research report on Power Finance Corporation (PFC), reiterating a BUY recommendation and setting a revised target price of INR 480 per share, down from INR 510 previously. The target price is based on a Sum-of-the-Parts (SoTP) valuation, rolling over to FY27 estimates.

PFC reported a Profit After Tax (PAT) of INR 44.6 billion for the second quarter of fiscal year 2026. This represents a 2% year-on-year (YoY) increase and was flat quarter-on-quarter (QoQ). Growth was supported by higher dividend income received and effective control over operating expenses.

The company's loan book expanded by 2% sequentially (QoQ) and 3% year-to-date (YTD). PFC reaffirmed its loan book growth guidance of 10-11% for the full fiscal year 2026. Notably, the share of the private sector in PFC's overall loan portfolio has increased to 24%, up from 20% a year ago. The private sector loan book has shown a significantly faster three-year Compound Annual Growth Rate (CAGR) of approximately 31% compared to the overall book's ~14% CAGR.

Considering the faster growth in the private sector book and evolving project financing norms, ICICI Securities models a higher credit cost of 15-30 basis points (bps) for FY26 and FY27, compared to around 10 bps in FY25. Despite this, the report anticipates PFC to achieve a Return on Equity (RoE) in the range of 16-18% for FY26 and FY27.

The revised target price of INR 480 is derived using a Sum-of-the-Parts (SoTP) methodology. This involves valuing each part of PFC separately. PFC's standalone business is valued at 1.1 times its FY27 Estimated Book Value (BV), a slight adjustment from the previous 1.3 times FY26 BV. The value of its stake in REC Limited (a subsidiary) is then added. A 25% holding company (holdco) discount is applied to the REC stake value, reflecting potential overheads or conglomerate costs associated with holding a subsidiary.

Impact This report provides a positive outlook for Power Finance Corporation investors, with a maintained BUY rating and a clear valuation framework. The revised target price indicates potential upside, though slightly lower than the previous target, reflecting adjustments in credit cost assumptions. This news could lead to increased investor interest and potentially influence PFC's stock performance. Impact Rating: 7/10

Difficult Terms: PAT: Profit After Tax, the profit a company has left after deducting all taxes. YoY: Year-on-Year, comparing a period to the same period in the previous year. QoQ: Quarter-on-Quarter, comparing a financial quarter to the previous financial quarter. opex: Operating Expenses, the costs a business incurs to run its operations. Loan book: The total amount of money a financial institution has lent out to its borrowers. YTD: Year-to-Date, the period from the beginning of the current calendar or fiscal year up to the current date. Guidance: A forecast or projection provided by a company about its future financial performance. Subsidiary: A company controlled by a holding company. Prepayment: Paying off a debt before its due date. Exposure: The amount of money lent or invested that could be lost. Private sector: Businesses owned by individuals or groups, not by the government. CAGR: Compound Annual Growth Rate, the average annual growth rate of an investment over a specified period of time. Credit cost: The cost associated with potential loan defaults or losses on loans. bps: Basis Points, a unit equal to 1/100th of 1%, often used for interest rates and fees. RoE: Return on Equity, a measure of how much profit a company generates with the money shareholders have invested. SOTP: Sum-of-the-Parts, a valuation method where a company's overall value is determined by valuing each of its business segments or subsidiaries separately and then adding them together. TP: Target Price, the price at which a stock analyst or broker expects a stock to trade in the future. BV: Book Value, the value of a company's assets minus its liabilities, as recorded on its balance sheet. REC: Rural Electrification Corporation (a subsidiary of PFC). Holdco discount: A discount applied to the value of a holding company's stake in its subsidiaries, reflecting potential inefficiencies or conglomerate costs.