REC, PFC shares get another addition to their 'consensus buy' list; check price targets

Global brokerage firm Morgan Stanley has initiated coverage on REC Ltd. and Power Finance Corporation Ltd. (PFC), two key power financing PSUs, with an 'Overweight' rating.

The brokerage has a price target of ₹485 on REC and a target of ₹508 on PFC, implying a potential upside of 23% and 21%, respectively, from Wednesday's closing levels.

Morgan Stanley believes these stocks, out of favour over the past nine months after strong investor interest in 2023 and 2024, now offer attractive risk-reward, both in absolute terms and relative to peers.

Despite a sharp rally in NBFC stocks year-to-date, shares of REC and PFC have corrected 24-35% over the past 12 months, in comparison to a 4.7% gain in the benchmark Sensex.

Morgan Stanley expects both companies to continue delivering low-teens loan growth, high-teens return on equity (ROE), and maintain self-sustaining operations with current dividend yields of 3.8-4.5% (based on a 30% payout ratio).

The asset quality cycle remains benign, with limited incremental slippages and potential gains from bad loan recoveries.

At a zero-growth P/E of 5-6x (FY27 estimated), the stocks are not only pricing in structural concerns but also present compelling near-term risk-reward, especially as retail NBFCs face softening loan growth and asset quality, the brokerage said.

Morgan Stanley forecasts a 21-23% upside over the next year, putting REC and PFC in the top quartile of its coverage universe.

Interestingly, the brokerage also highlights a framework it uses to generate alpha between the two stocks over shorter time frames.

What could be the catalyst after underperformance over the past year?

Morgan Stanley believes relative financial outperformance versus other NBFC peers could be a key catalyst in the coming quarters. It expects both companies to outperform on asset quality and gradually narrow the gap on loan growth with retail-focused NBFCs. A broader rally in PSU stocks could also act as a tailwind.

At current valuations, the brokerage sees similar risk-reward profiles for both REC and PFC.

On the risk side, it flags slower loan growth (potentially falling to single digits) and increased competition from banks as more likely than deterioration in asset quality.

All 13 analysts each tracking REC and PFC have 'Buy' ratings on both the stocks.

So far in 2025, REC and PFC shares are down 23% and 7%, respectively, and remain 40% and 28% below their record highs.

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