PFC, REC Shares Fall Up To 3% As Morgan Stanley Cuts Growth Estimates

Shares of Power Finance Corporation (PFC) and REC declined up to 3% in Thursday's trading session after Morgan Stanley cut its growth estimates for both power financiers, citing concerns over slower loan growth.

PFC shares settled 2.9% lower at ₹363.60 per share on the NSE, while REC shares declined 2.4% to ₹328.90.

Merger May Offer Scale Benefits

Morgan Stanley said the proposed merger of PFC and REC could provide some revenue benefits through greater scale and reduced competition, although the scope for cost savings could remain limited.

Under the proposed merger, REC shareholders will receive 88 PFC shares for every 100 shares held. PFC expects to complete the merger with REC by April 1, 2027, subject to the required regulatory approvals.

The brokerage said both companies already have low operating costs, limiting the potential for meaningful cost savings. However, the combined entity could benefit from greater scale and the elimination of competition between PFC and REC.

Slower Loan Growth Remains Concern

The merger comes as both PFC and REC face slower loan growth. Morgan Stanley said the gap between loan growth at the two companies and bank credit growth to the power sector has widened significantly.

For PFC, the brokerage cut its estimates for core earnings per share by 5.5% for FY28 and 7% for FY29.

It also lowered its estimate for PFC's loan compound annual growth rate for FY26-29 to around 6% from around 9% earlier.

Morgan Stanley said PFC's asset quality remains supportive and expects the company to continue generating mid-teens core return on equity during FY27-29, with stable margins and manageable credit costs.

However, it flagged loan growth as a concern as bank credit to the power sector and overall system credit have accelerated.

For REC, Morgan Stanley also lowered its earnings estimates, along with its long-term loan growth and profitability assumptions. It expects REC's loan growth to remain moderate.

Overall, the brokerage said the proposed merger could create benefits through greater scale and reduced competition, but immediate cost-saving opportunities appear limited.