PFC–REC merger: MOFSL sees operating synergies, retains ‘Buy’ on both PSU stocks
MOFSL said the PFC-REC merger should deliver meaningful operating synergies through the rationalisation of overlapping functions and stronger bargaining power with lenders.
- Feb 11, 2026,
- Updated Feb 11, 2026 9:52 AM IST
Motilal Oswal Financial Services (MOFSL) on Wednesday retained its 'Buy' rating on Power Finance Corporation Ltd and REC Ltd despite a mixed December quarter performance by the two public sector undertakings. The domestic brokerage said uncertainty remained around the finer details of the proposed PFC–REC merger, but added that the combination should deliver meaningful operating synergies through the rationalisation of overlapping functions and stronger bargaining power with lenders.
"Competitive intensity, at least between PFC and REC, is also likely to ease, with the merged entity emerging as a dominant, government-backed power financier with greater scale and stability," it said.
To recall, the PFC board had considered the proposal and granted in-principle approval for a merger between PFC and REC, while affirming that the merged entity would continue to be classified as a “government company”. This followed Finance Minister Nirmala Sitharaman outlining a “Viksit Bharat” roadmap for public sector NBFCs in the Union Budget 2026-27, with explicit targets for credit growth and technology adoption. The Government of India had proposed the restructuring of PFC and REC.
The proposed restructuring is intended to retain the merged entity’s status as a government company under the Companies Act, 2013, and other applicable laws, MOFSL said.
For the December quarter, PFC’s Q3 profit grew 15 per cent YoY, which was in line with MOFSL estimates. NII grew 19 per cent YoY, which was higher than MOFSL estimates. Other operating income growth at 14 per cent YoY also beat MOFSL estimates.
"We estimate a disbursement/advances/PAT CAGR of 11 per cent/13 per cent/8 per cent over FY26-FY28, an RoA/RoE of 3 per ecnt/18 per cent, and a dividend yield of 4.9 per cent in FY28. We reiterate our BUY rating with an SoTP (Dec’27E)-based target of Rs 500 (premised on a 1x target multiple for the PFC standalone business and Rs 144/share for PFC’s stake in REC after a hold-co discount of 20 per cent)," it said.
In another note, MOFSL said REC's Q3 PAT was flat YoY, which missed its estimate by 7 per cent. Its NII grew 3 per cent YoY, which was in line with its estimates.
MOFSL said REC reported another muted quarter, with the loan book remaining largely flat sequentially amid weak disbursements and higher rundown and pre-payments. Asset quality improved, with GNPA declining to 0.9 per cent. However, NIM moderated on a sequential basis due to a rise in CoF and moderation in yields, it said.
"REC trades at 0.9x FY27E P/ABV, indicating attractive valuations. However, slower loan growth and thin margins remain key monitorables. We model a CAGR of 12 per cent/12 per cent/9 per cent in disbursement /loans/PAT over FY26-28E. We estimate RoA/RoE of 2.6 per cent/18 per cent and a dividend yield of 7 per cent in FY28E. Maintain Buy with a target of Rs 430," it said.
Motilal Oswal Financial Services (MOFSL) on Wednesday retained its 'Buy' rating on Power Finance Corporation Ltd and REC Ltd despite a mixed December quarter performance by the two public sector undertakings. The domestic brokerage said uncertainty remained around the finer details of the proposed PFC–REC merger, but added that the combination should deliver meaningful operating synergies through the rationalisation of overlapping functions and stronger bargaining power with lenders.
"Competitive intensity, at least between PFC and REC, is also likely to ease, with the merged entity emerging as a dominant, government-backed power financier with greater scale and stability," it said.
To recall, the PFC board had considered the proposal and granted in-principle approval for a merger between PFC and REC, while affirming that the merged entity would continue to be classified as a “government company”. This followed Finance Minister Nirmala Sitharaman outlining a “Viksit Bharat” roadmap for public sector NBFCs in the Union Budget 2026-27, with explicit targets for credit growth and technology adoption. The Government of India had proposed the restructuring of PFC and REC.
The proposed restructuring is intended to retain the merged entity’s status as a government company under the Companies Act, 2013, and other applicable laws, MOFSL said.
For the December quarter, PFC’s Q3 profit grew 15 per cent YoY, which was in line with MOFSL estimates. NII grew 19 per cent YoY, which was higher than MOFSL estimates. Other operating income growth at 14 per cent YoY also beat MOFSL estimates.
"We estimate a disbursement/advances/PAT CAGR of 11 per cent/13 per cent/8 per cent over FY26-FY28, an RoA/RoE of 3 per ecnt/18 per cent, and a dividend yield of 4.9 per cent in FY28. We reiterate our BUY rating with an SoTP (Dec’27E)-based target of Rs 500 (premised on a 1x target multiple for the PFC standalone business and Rs 144/share for PFC’s stake in REC after a hold-co discount of 20 per cent)," it said.
In another note, MOFSL said REC's Q3 PAT was flat YoY, which missed its estimate by 7 per cent. Its NII grew 3 per cent YoY, which was in line with its estimates.
MOFSL said REC reported another muted quarter, with the loan book remaining largely flat sequentially amid weak disbursements and higher rundown and pre-payments. Asset quality improved, with GNPA declining to 0.9 per cent. However, NIM moderated on a sequential basis due to a rise in CoF and moderation in yields, it said.
"REC trades at 0.9x FY27E P/ABV, indicating attractive valuations. However, slower loan growth and thin margins remain key monitorables. We model a CAGR of 12 per cent/12 per cent/9 per cent in disbursement /loans/PAT over FY26-28E. We estimate RoA/RoE of 2.6 per cent/18 per cent and a dividend yield of 7 per cent in FY28E. Maintain Buy with a target of Rs 430," it said.