Morgan Stanley Rates REC and PFC: Strong Buy Signals

Morgan Stanley Initiates Coverage on REC and PFC with ‘Overweight’ Rating

Global brokerage firm Morgan Stanley has initiated coverage on REC Ltd. and Power Finance Corporation Ltd. (PFC) with an ‘Overweight’ rating. The firm has set a price target of ₹485 for REC and ₹508 for PFC.

Potential Upside

The price targets imply a potential upside of 23% for REC and 21% for PFC from current levels. Morgan Stanley believes these stocks offer attractive risk-reward, both in absolute terms and relative to peers.

Reasons for Optimism

1. Low-teens loan growth: Morgan Stanley expects both companies to deliver low-teens loan growth.
2. High-teens return on equity: The firm expects high-teens return on equity (ROE) for both companies.
3. Self-sustaining operations: REC and PFC are expected to maintain self-sustaining operations with current dividend yields of 3.8-4.5%.

Catalysts for Growth

1. Relative financial outperformance: Morgan Stanley believes relative financial outperformance versus other NBFC peers could be a key catalyst.
2. Broader rally in PSU stocks: A broader rally in PSU stocks could act as a tailwind.

Risks

1. Slower loan growth: Slower loan growth, potentially falling to single digits, is a risk.
2. Increased competition: Increased competition from banks is another risk.

Morgan Stanley forecasts a 21-23% upside for REC and PFC over the next year. Both stocks have ‘Buy’ ratings from analysts.