Tuesday, Motilal Oswal Securities initiated coverage on Power Finance Corp Ltd (POWF:IN) with a Buy rating and a price target of INR560.00. The firm highlighted the company's role as one of India's key public sector entities focused on financing power assets. With a significant portion of its loans directed towards power generation, including a notable share in renewable energy, Power Finance Corp has a diversified presence across the power value chain.
The company's loan portfolio shows a considerable exposure to power generation, accounting for approximately 48% of loans as of June 2024, of which about 13% is invested in renewable energy. The analysis also indicated that a smaller fraction, nearly 19%, of Power Finance Corp's loans are extended to private sector players.
Despite the company's strong emphasis on renewable energy and infrastructure lending, competition from banks is expected to lead to a slight compression in the firm's interest rate spreads. Motilal Oswal Securities predicts a contraction of around 20 basis points in spreads over the next two years. This forecast is based on the competitive landscape within the sector, where banks are also vying for a share of the infrastructure lending market.
Furthermore, a detailed project-level analysis by Motilal Oswal Securities suggests that Power Finance Corp's asset quality is set to improve. This improvement will be supported by the resolution of stressed assets, particularly in thermal generation, and by lower credit costs. The firm anticipates credit costs, including write-backs from recoveries, to be less than 5 basis points over the coming three years.
The report underscores the positive outlook for Power Finance Corp, reflecting confidence in the company's strategic focus on renewable energy and infrastructure, as well as its ability to navigate the competitive landscape and maintain strong asset quality.
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