Better PSU Finance Stock: PFC vs REC

India is one of the largest producers and consumers of energy in the world. Despite this, India's per capita consumption is around one-third of the world average.

This leaves a lot of scope for growth for top power companies in India.

In addition to this, with a rapidly growing population and urbanisation, energy needs are going to increase further.

This surge in demand creates a pressing need for enhanced power infrastructure across the entire value chain, from generation to transmission.

With this infrastructure demand comes the necessity for financing.

Two primary players in the power financing space are Power Finance Corporation and REC.

Both extend the majority of their loans to the power sector, making them major beneficiaries of the rising demand for power.

Let's compare the two companies across different parameters to see who is a better player.

Business Overview

#Power Finance Corporation (PFC)

Power Finance Corporation (PFC) is a government of India enterprise that is registered as a non-deposit-taking NBFC (Non-Banking Finance Company) with the Reserve Bank of India (RBI).

It is engaged in extending financial assistance to infrastructure projects of the Indian power sector.

It offers fund-based products such as project term loans, lease financing, and debt refinancing, as well as non-fund-based products such as deferred payment guarantees and letters of comfort/intent.

The company disburses the majority of its loans (over 80%) to the government sector and the rest to private sector companies.

#REC

REC, a central public sector undertaking under the Ministry of Power, is a infrastructure financing company. It is also a subsidiary of PFC.

It is engaged in the business of extending loans to the power sector value chain from generation to distribution.

The company also forayed into infrastructure and logistics sector and is funding metro, road and highways, port waterways and steel infra projects.

Just like PFC, even REC funds major government projects, but the share of private projects is growing in its loan book.

Particulars	Power Finance Corporation	REC
Market Cap (in Rs billion)*	1,684.7	1,519.9

Source: Equitymaster|*10th September 2024

Between the two companies, PFC is a larger company in terms of marketcap. It has a marketcap of Rs 1,684.7 billion (bn), as against Rs 1,519.9 bn of REC.

If we compare the two companies in terms of their performance on the bourses, then REC is leading with a 127% return, as against 121% return of PFC.

However, both companies have managed to give multi-bagger market-beating returns when compared to the market index Nifty 50.

#Net Interest Income (NII)

Interest income is a major source of revenue for a financing company.

The difference between the interest income and expense is the net interest income.

Net interest margin is the ratio of net interest income and average loans and advances. A high net interest margin indicates that the financial institution is generating good interest income from its loans and advances.

In the last five years, the net interest income of PFC and REC grew by a CAGR of 9.2% and 9.9%, respectively.

High growth in loans and advances has helped both companies achieve strong net interest income growth.

The net margin ratio for the PFC and REC averaged 37.8% and 39.3%, respectively.

Clearly, REC is leading in terms of net interest income growth and net interest margin ratio.

Interest income

Interest income (Rs m)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	5-Year CAGR
Power Finance Corporation	6,21,894	7,16,561	7,62,617	7,75,683	9,10,967	7.9%
REC	2,99,517	3,55,528	3,92,691	3,94,783	4,75,048	9.7%
Interest expense (Rs m)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	5-Year CAGR
Power Finance Corporation	4,08,522	4,46,877	4,47,121	4,70,258	5,79,865	7.3%
REC	1,89,972	2,14,919	2,20,539	2,37,413	2,99,647	9.5%
Net interest income (Rs m)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	5-Year CAGR
Power Finance Corporation	2,13,372	2,69,684	3,15,496	3,05,425	3,31,103	9.2%
REC	1,09,544	1,40,610	1,72,152	1,57,369	1,75,400	9.9%
Net interest margin (%)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Power Finance Corporation	34.3%	37.6%	41.4%	39.4%	36.3%
REC	36.6%	39.5%	43.8%	39.9%	36.9%

Source: Equitymaster

#Profitability

We can assess the profitability metric by measuring the net profit growth and margin expansion.

In the last five years, the net profit of PFC grew by a CAGR of 22.6%, whereas REC's net profit grew by a CAGR of 23.3%.

Both the company's margins expanded over the last five years and averaged 17.7% for PFC and 24.8% for REC, respectively.

Although PFC's profit numbers are higher, REC has a lead with respect to profitability due to higher margins.

Profitability

PAT (in Rs m)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	5-Year CAGR
Power Finance Corporation	71,221	1,17,478	1,40,148	1,58,893	1,97,612	22.6%
REC	49,723	83,782	1,00,357	1,11,670	1,41,455	23.3%
Net Profit Margin	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Power Finance Corporation	11.5%	16.4%	18.4%	20.5%	21.7%
REC	16.6%	23.6%	25.6%	28.3%	29.8%

Source: Equitymaster

#Advances

Advances are the loans a finance company lends to its customers. It is important to track the growth of advances as it is one of the primary sources of income for a finance company.

In the last five years, the advances of PFC and REC grew at a CAGR of 8.4% and 9.8% respectively.

PFC's loan book grew primarily because the company forayed into new businesses that were diversifying from the existing conventional energy to renewable energy, as well as the infrastructure and logistics sector.

REC's loan book is distributed across power generation, distribution, transmission, renewable energy, and infrastructure. The diversified nature of the loan book aided the loan book growth.

Advances

Advances (in Rs m )	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	5-Year CAGR
Power Finance Corporation	64,61,961	72,23,868	73,28,508	83,29,034	96,91,112	8.4%
REC	31,20,835	36,52,615	37,19,305	42,20,839	49,91,921	9.8%
Advances Growth (%)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Power Finance Corporation		11.8%	1.4%	13.7%	16.4%
REC		17.0%	1.8%	13.5%	18.3%

Source: Equitymaster

#Net NPA

A financial institution marks an asset as a non performing asset (NPA) if it isn't earning interest for more than 90 days. A rising NPA can be a cause of concern as it affects its profitability.

To gauge the level of NPAs, we can look at net NPAs. Net NPAs are a measure of non-performing assets as a percentage of total loans. The lower the percentage, the better.

The net NPAs of PFC are lower at 0% compared to 0.1% of REC at the end of the financial year 2024.

In the last five years, the asset quality of both companies has improved significantly, primarily due to recoveries of NPAs in the last year.

Moreover, over the last few years, the companies have also focussed on enhancing their provision coverage, which has aided the improvement of the net NPAs.

Net NPA

Net NPA (%)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Power Finance Corporation	0.2%	0.1%	0.1%	0.1%	0.0%
REC	0.3%	0.2%	0.2%	0.1%	0.1%

Source: Equitymaster

#Financial Efficiency

Two ratios that help in measuring the financial efficiency of a financial institution are the capital adequacy ratio and return on equity (RoE).

Capital adequacy ratio is the measure of capital against the risk-weighted credit exposures. As per the Basel III norms, the capital adequacy ratio should be a minimum of 8% to ensure the finance company doesn't face insolvency issues.

RoE, on the other hand, measures the return a company generates for its equity shareholders. A high RoE is considered good.

PFC and REC have an average capital adequacy ratio of 21.8% and 22.2%, respectively, indicating that both have enough capital as reserves.

The RoE of both the companies has been increasing over the last few years and averaged at 18% indicating both have a similar RoE.

In terms of financial efficiency, both the companies are at par.

Financial Efficiency

Capital Adequacy Ratio	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Power Finance Corporation	17.0%	18.8%	23.5%	24.4%	25.4%
REC	16.1%	19.7%	23.6%	25.8%	25.8%
ROE	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Power Finance Corporation	14.4%	19.3%	19.6%	18.9%	19.5%
REC	14.0%	19.1%	19.6%	19.2%	20.4%

Source: Equitymaster

#Dividend

A company pays dividends from the profits. If a company is paying consistent dividends, it is considered more stable than other companies.

We can assess the dividends through the dividend per share, dividend yield, and dividend payout ratio.

In terms of dividend per share, both companies have been paying consistently high dividends to their shareholders. PFC and REC's dividend per share grew by a CAGR of 12.2% and 14.2%, respectively, in the last five years.

The dividend payout of PFC and REC averaged 25% and 32%, respectively, during the same period, whereas the dividend yield averaged 8.4% and 9.8%, respectively.

Although both the companies are dividend paymasters having high dividend yield, clearly, REC is slightly ahead with respect to dividends compared to PFC.

Dividend

Dividend Per Share (Rs)	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	5-Year CAGR
Power Finance Corporation	7.6	8.0	9.6	10.6	13.5	0.1
REC	8.3	9.5	11.5	12.6	16.0	0.1
Dividend Yield	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Power Finance Corporation	10.3%	8.8%	10.7%	8.7%	3.5%
REC	12.4%	9.7%	12.4%	10.9%	3.5%
Dividend Payout Ratio	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24
Power Finance Corporation	35.2%	22.5%	22.6%	22.0%	22.5%
REC	43.7%	30.0%	30.1%	29.7%	29.8%

Source: Equitymaster

#Valuation

Valuation ratios help in estimating the actual worth of the company. Two valuation ratios that are widely used are price-to-earnings (P/E) and price-to-book value (P/B).

Both help in assessing whether a company is overvalued or undervalued.

The PE and PB ratios of PFC are 6.1x and 1.6x, respectively, whereas REC's ratios stand at 10.4x and 2.1x, respectively.

Clearly, REC's shares are overvalued when compared to PFC.

However, if we compare the two companies with their industry average, then both companies are undervalued.

Valuations	Power Finance Corporation	3-Year Average	REC	3-Year Average
PE (x)	6.1	3.7	10.4	6.2
PB (x)	1.6	0.9	2.1	1.2

Source: Equitymaster

Which PSU finance is better: PFC vs REC?

In terms of interest income growth, profitability, advances growth, financial efficiency, and dividend, REC is leading against PFC.

However, PFC isn't far behind and is just slightly lower across various parameters against REC.

PFC also has a larger advance base, higher net interest income, and higher profits than REC.

PFC has expanded its portfolio beyond power projects and is now funding metro projects, smart cities, infrastructure projects, and road projects for both government and private players.

It also recently entered the IFSC Gift City, which is the company's strategic leap towards the global financing arena.

The company is also diversifying its fudning across renewable energy projects to capture the growth in this high growth space.

REC majorly funds power sector projects, but it recently forayed into infrastructure projects and road and highway projects.

It also funds renewable energy projects and aims to expand its green lending by eight times by 2030.

Just like PFC, it is planning to establish a subsidiary in the IFSC Gift City to expand its presence internationally.

With the growing demand for energy, high renewable energy adoption, infrastructure development, and government support, power financing companies are bound to experience high growth.

Given that PFC and REC are well-established players in this space, they are set to witness strong growth in the medium term.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here.