PFC and REC are doing well now; should you buy them? Digant Haria answers

“PFC and REC are pure play on power, infrastructure and logistics. That is something I will keep a watch on in 2023. They sit at the intersection of the capex and infrastructure theme as well as the financial sector theme,” says Digant Haria, Co-founder, GreenEdge Wealth.

The metal stocks are up because China is opening up and if China is opening up then why should Tata Motors not go up as JLR gets big business from there?
I think you are absolutely bang on. JLR typically represents rich man’s consumption and China opening up is going to throw a lot of surprises and Tata Motors could really benefit there and even the Indian business of Tata Motors caters more to rich men, not the average middle class. So, I do not see why on the sales front they can actually surprise. So you are right, this may be the time for Tata Motors.

The second stock that you mentioned is LIC. I think LIC depends a bit on the government and so I will not stick out my neck. LIC will do well but there are two more stocks in the PSU space which are very interesting; one is PFC and second is REC. They sit at the intersection of the capex and infrastructure theme as well as the financial sector theme. I think they are still at 0.5 times book. They were not growing very fast because of their large size and slow capex. A lot of these issues are getting resolved in PFC and REC. They are trading at 8% dividend yields.

If growth in infra picks up, I do not think these guys should be left behind. SBI was the only one which was running in the PSU pack a year back and then we had follow up by public sector banks like Bank of Baroda and even Union Bank, Punjab National Bank.

PFC and REC are the only two which are left and they are pure play on power, infrastructure and logistics. That is something I will keep a watch on in 2023.

The other space I wanted to discuss with you is with respect to what is happening with the entire real estate basket. We have not seen much happening there with respect to at least the stock prices though there is a lot of clamour around how the demand is still quite robust. Why do you think there is a bit of a dichotomy when it comes to share prices and profitability and also what is happening with demand on the ground?
Yes, we were quite positive on real estate and the stocks really did not do well despite the sales. I could sense that there are two things which the market is worried about. Last year, big inflation came through in cement and all kinds of building materials which go into building a house and that would probably be the only reason of concern which I could figure out.

Apart from that, the sector outlook is really healthy and it is again representative of the rich men’s consumption which is really booming in India. We have to use this opportunity to buy these stocks.

One thing which I want to highlight is that Godrej Properties used to do an asset light model. They would never buy land but in the last six months, they have gone on a crazy land buying spree because they also are sensing that 12 -18 months from now, we will start seeing real estate prices going up and when the selling price per square feet goes up, these companies will start making good margins.

Right now, we are seeing good volumes. Maybe a year or two later, we will see good margins and that is when the real kicker to the earnings comes through. This is just a consolidation phase we will treat as an opportunity to lap up the good stocks which are there in the real estate sector. The demand is there.

REC and PFC – both higher dividend yielding stocks which should underperform when interest rates are moving higher – suddenly doing very well? There is nothing interesting about their business, these are very basic businesses but they offer a lot of dividend yield.
If I rewind back to 2010, these were always boring businesses. These are central government companies who borrow at very good rates because of the central government as a parent and then they lend to state government companies which are not very disciplined in Tamil Nadu, Andhra Pradesh, Telangana, Rajasthan and Uttar Pradesh. They used to trade at 2.5 times price to book in 2010. Then they started lending to the private sector power projects, the private sector power went into a complete tailspin after 2012 and these stocks derated from 2.5 times to half times price to book.

They are literally trading at half times price to book and now all the private sector problems that they had and private sector power projects they have done, some of the provisions may revive and so now there is hope that earnings will again start improving.

Their earnings have stagnated for some reason over the last two-three years mainly on this provisioning and lack of growth but now there is growth as the government has allowed them to lend outside the power sector and so they lend to the metro projects, port projects, airports and logistics. So they will grow and they can give dividends.

The market does not like a purely dividend paying company but they will like a company when the dividends can grow. Till now, they have always been great dividend paying companies but there was no visibility of any growth. Now suddenly there is a good visibility of growth because the government is very serious about doing the capex on the entire infrastructure and which is why, despite the rising rates, since the stocks are extremely cheap, they will do well irrespective of the interest rate cycle.