Key Takeaways
- Q3 FY26 PAT up ~15% YoY to INR 47.6 bn, outpacing most peers.
- NII rose 19% YoY, beating estimates by 5%.
- Cost‑to‑income ratio improved 10 bp to 3.55%, indicating tighter cost control.
- Standalone valuation at 0.9× FY27 P/BV and ~5× FY27 P/E – a rare discount in the infra‑finance space.
- Motilal Oswal reiterates BUY with a target of INR 500, implying upside of over 15% from current levels.
You missed the quiet earnings surge that could supercharge your portfolio.
Power Finance Corporation (PFC) just delivered a set of numbers that many analysts are flagging as a catalyst for a multi‑month rally. The 3Q FY26 results show a 15% year‑on‑year jump in profit after tax (PAT), robust net interest income growth, and a healthier cost structure—all while trading at a discount that few infrastructure lenders can match.
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Why Power Finance Corporation's 15% PAT Growth Beats Market Expectations
The bottom line rose to INR 47.6 bn, comfortably in line with internal guidance but notably ahead of many sell‑side forecasts. The boost came from a 19% increase in net interest income (NII) to INR 56.1 bn, driven by higher interest spreads on its loan book and a modest uptick in new project financing. Meanwhile, other operating income surged 14% YoY, buoyed by a one‑off dividend windfall of INR 6.7 bn from its equity stakes.
How PFC's Cost‑to‑Income Ratio Improvement Signals Operational Discipline
Operating expenses rose 8% YoY to INR 2 bn, but because revenue grew faster, the cost‑to‑income ratio slipped 10 basis points to 3.55%. In the Indian financial services arena, a ratio below 4% is considered a benchmark of efficiency, especially for a public sector‑linked lender with a sizable balance sheet. The improvement suggests that PFC is successfully leveraging technology and process automation to contain overheads.
Sector Lens: What PFC's Results Reveal About India's Infrastructure Finance Landscape
Infrastructure financing remains a high‑growth segment, with government spending on roads, rail, and renewable energy projected to exceed INR 15 trn over the next five years. PFC, as a key conduit for sovereign and private project funding, benefits from this pipeline. Its stable asset quality (gross NPA ratio hovering around 2%) and steady cash‑flow generation make it a bellwether for the sector. The modest impact of the new labor code, as disclosed by the company, also alleviates a regulatory risk that has haunted peers.
Competitive Benchmark: PFC vs Tata Power and Adani Transmission
While PFC trades at ~0.9× FY27 P/BV, Tata Power's power‑generation arm is priced around 2.5× FY27 P/BV, reflecting higher growth expectations but also greater exposure to commodity price volatility. Adani Transmission, a pure transmission asset holder, commands ~1.2× FY27 P/BV. The discount on PFC is therefore a relative value play: investors receive a diversified loan portfolio, government backing, and a modest dividend yield (~2%) at a fraction of the multiple paid for peers.
Historical Parallel: PFC's 2022 Q3 Upswing and Subsequent Stock Rally
Back in Q3 FY22, PFC posted a 12% PAT increase and the stock rallied 18% over the following six months, largely on the back of a similar valuation gap. Those investors who entered on the dip reaped outsized returns when the market re‑rated infrastructure financing as a defensive yet growth‑oriented asset class during the fiscal year‑end capital allocation window. The pattern suggests a repeatable catalyst if earnings momentum sustains.
Valuation Deep Dive: Decoding the 0.9× FY27 P/BV and ~5× FY27 P/E Multiples
Motilal Oswal's price target of INR 500 assumes a 1× P/BV multiple for the standalone PFC business and a 20% discount on its REC stake, translating to an implied equity value of INR 144 per share for the REC holding. The modest FY27 earnings estimate (≈INR 100 bn) yields a forward P/E of about 5×, well below the sector average of 9–10×. Such compression leaves ample room for multiple expansion, especially if macro‑policy support for green infrastructure accelerates.
Investor Playbook: Bull and Bear Cases for Power Finance Corporation
Bull Case
- Continued fiscal stimulus for renewable and transport infrastructure fuels loan pipeline.
- Further multiple expansion as peers trade at higher valuations.
- Potential dividend upside if the REC stake contributes higher-than‑expected earnings.
- Stable asset quality reduces credit‑risk premium.
Bear Case
- Escalating sovereign borrowing costs could compress net interest margins.
- Policy shifts—such as stricter capital adequacy or delayed project approvals—could slow loan growth.
- Unexpected rise in non‑performing assets would pressure provisioning.
- Currency volatility impacting foreign‑currency liabilities.
We maintain a BUY rating, but investors should monitor macro‑policy cues and PFC's quarterly earnings trajectory for any signs of margin compression or credit stress.