Morgan Stanley sees up to 22% upside in PFC, REC

Mumbai: Brokerage Morgan Stanley has initiated coverage on Power Finance Corporation (PFC) and REC with 'Overweight' ratings on both stocks. The brokerage sees 18% and 22% upside in PFC and REC from current levels, respectively.

The brokerage said these stocks could see relative financial outperformance versus NBFC (non-banking financial company) peers over the next few quarters.

"We expect them to outperform on asset quality, and to reduce the gap on loan growth versus retail-focused NBFCs. Any potential PSU stock pullback rally could also be a catalyst," said the note. REC shares rose 1.5% to Rs397.5, while PFC gained 2.8% to Rs429.6 on Thursday

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Morgan Stanley said their current valuations are at a good entry point following the de-rating over the past 12 months.

In the past year, PFC has declined 23.5%, whereas REC has dropped 37%. The benchmark Nifty Next 50 is down 7.3% in this period.

"From a near-term perspective, wholesale lenders such as PFC and REC, appear better positioned on asset quality than do retail lenders, owing to low incremental slippages and potential benefits from recoveries from past NPA accounts," said the note.