Brokerage cuts PFC and REC to ‘Equal Weight’, slashes price targets by up to 20%; slower loan growth and limited margin expansion emerge as key risks

Shares of Power Finance Corporation (PFC) and REC Limited came under pressure on Thursday after global brokerage Morgan Stanley downgraded both power-sector financing companies, citing a sharp moderation in loan growth and a less favourable outlook for earnings expansion.

PFC shares declined as much as 2.5 per cent to ₹365.05, while REC fell 2.8 per cent to ₹327.50 during intraday trading on the NSE. The selling came despite a broader recovery in the domestic equity market, with the Nifty 50 trading higher during the session.

Morgan Stanley downgraded both stocks to ‘Equal Weight’ from ‘Overweight’ and significantly reduced its valuation targets. The brokerage cut its target for PFC by 20 per cent to ₹410, while REC's target was reduced by 16 per cent to ₹360.

Why Did Morgan Stanley Downgrade PFC and REC?

The primary concern is the slowdown in loan growth.

PFC reported loan growth of only around 4 per cent year-on-year in Q1 FY27, significantly below the 16 per cent growth recorded in Q1 FY26. REC's loan growth was even weaker at approximately 1 per cent year-on-year, compared with 10 per cent during the same period a year earlier.

The slowdown is particularly notable because overall credit conditions have strengthened.

Morgan Stanley pointed out that system non-food credit growth accelerated to 18.3 per cent year-on-year in Q1 FY27, compared with 8.9 per cent in Q1 FY26. At the same time, bank credit to the power sector increased to around 23.8 per cent, compared with 7.7 per cent previously.

This suggests that PFC and REC are currently not capturing the broader improvement in power-sector credit demand at the pace investors had expected.

Competitive Pricing Could Create a Margin Problem

One of the biggest challenges for PFC and REC is balancing loan growth with profitability.

The companies could attempt to regain market share by offering loans at more competitive rates. While this could support disbursements and loan growth, it could simultaneously put pressure on lending spreads and net interest margins.

Alternatively, protecting margins by maintaining lending spreads could result in continued pressure on loan growth.

Morgan Stanley believes this creates a difficult trade-off for both companies.

The brokerage therefore sees a less straightforward path towards a meaningful acceleration in net interest income (NII) than it previously anticipated.

Asset Quality Provides Less Room for Earnings Upgrades

Another concern highlighted by Morgan Stanley is the already-strong asset-quality position of the two lenders.

Impaired asset ratios at PFC and REC are close to historical lows. While this is positive from a balance-sheet perspective, it also means that there is less room for further earnings upgrades through additional recoveries or a significant reduction in stressed assets.

In previous periods, improving asset quality helped support profitability and investor sentiment.

With asset-quality ratios already at favourable levels, future earnings growth will increasingly have to come from loan growth, margins and operating performance rather than continued recovery in stressed assets.

Morgan Stanley Cuts FY28 and FY29 Earnings Estimates

The cautious outlook has prompted Morgan Stanley to reduce its earnings expectations for both companies.

For PFC, the brokerage has cut its core EPS estimates by approximately 5.5 per cent for FY28 and 7 per cent for FY29.

For REC, core EPS estimates have been lowered by around 5 per cent for FY28 and 7 per cent for FY29.

The earnings revisions were accompanied by the downgrade in ratings and lower price targets.

The revised targets indicate that Morgan Stanley sees limited near-term upside unless loan growth starts showing a meaningful recovery.

Stock Performance Reflects Growing Investor Caution

The downgrade comes at a time when both stocks have already struggled to generate strong returns.

PFC shares have been broadly flat so far in 2026, while REC has declined around 10 per cent during the year.

PFC was trading significantly below its 52-week high of ₹486.50, while REC has also remained under pressure.

The divergence between the two stocks and the broader market indicates that investors are increasingly focused on the sustainability of earnings growth rather than simply the long-term structural opportunity in India's power sector.

India's Power Investment Cycle Remains a Long-Term Positive

Despite the downgrade, the long-term story for power-sector financiers remains intact.

India is expected to require significant investment in electricity generation, transmission and distribution infrastructure as power consumption rises and renewable-energy capacity expands.

The transition towards renewable energy, grid modernisation, storage infrastructure, electrification and rising industrial power demand could create substantial financing opportunities.

PFC and REC, as specialised lenders to the power sector, are strategically positioned to participate in this investment cycle.

However, the immediate challenge is converting this structural opportunity into sustainable balance-sheet growth.

Bank Credit Growth Creates a Key Warning Signal

The rapid increase in bank lending to the power sector is particularly important for investors.

If banks continue to expand their presence aggressively, PFC and REC could face greater competition for high-quality borrowers.

This could force the two companies to either reduce lending rates to defend market share or accept slower loan growth to protect margins.

Either scenario could limit the pace of NII and profit growth in the near term.

The situation will therefore require close monitoring over the next few quarters.

What Could Turn the Outlook Positive?

Morgan Stanley has identified a relatively clear trigger for becoming more constructive on the two stocks.

A sustained recovery in loan growth towards low-double-digit levels could improve the brokerage's outlook.

Such an acceleration would indicate that PFC and REC are successfully participating in the broader expansion in power-sector credit and are maintaining their competitive position against banks and other lenders.

Investors should therefore monitor:

• Loan book growth

• New sanctions and disbursements

• Net interest margins

• Net interest income growth

• Cost of funds

• Asset-quality trends

• Capital adequacy

• Competitive intensity from banks

• Management commentary on the power-sector capex cycle

Key Risk: Growth Without Margin Expansion

For investors, one of the biggest risks is that PFC and REC may have to choose between growth and profitability.

Aggressive pricing could boost loan growth but compress spreads, while maintaining margins could restrict balance-sheet expansion.

At the same time, with asset-quality improvements already largely reflected, earnings may become more dependent on organic loan growth.

This makes the next few quarterly results particularly important for determining whether the current slowdown is temporary or indicative of a longer-term structural shift.

Market Outlook

The Morgan Stanley downgrade highlights a near-term challenge for PFC and REC despite the favourable long-term power investment cycle.

The companies continue to benefit from India's growing electricity and infrastructure requirements, but their weak Q1 FY27 loan growth stands in contrast to the much stronger expansion in overall system credit and bank lending to the power sector.

For investors, the immediate focus should therefore remain on whether loan growth can recover without significant pressure on lending spreads.

A move towards low-double-digit loan growth could improve sentiment and revive earnings-growth expectations. On the other hand, continued weakness could lead to further earnings downgrades and keep valuations under pressure.

The key takeaway is that the long-term power-financing story remains attractive, but near-term stock performance is likely to depend more on loan-growth recovery and margin discipline than on the broader power-sector opportunity alone.