Power Finance Corporation Q2 FY26: Profit Decline Amid Rising Costs Raises Concerns

The results paint a mixed picture for the Maharatna public sector enterprise. While the company continues to demonstrate robust year-on-year growth with revenue expanding 12.32% to ₹28,890.24 crores, the sequential profit decline has overshadowed these positives. The contraction in profitability comes despite modest revenue growth, suggesting margin pressures and rising operational costs are beginning to weigh on the bottom line. With the stock trading significantly below its 52-week high of ₹523.65 and institutional investors reducing their positions, market sentiment has turned cautious.

Quarterly Performance Trend: Momentum Stalls

Financial Performance: Margin Compression Emerges

Power Finance Corporation's Q2 FY26 financial performance reveals concerning trends beneath the surface. Revenue from operations grew a modest 1.23% quarter-on-quarter to ₹28,890.24 crores, whilst year-on-year growth remained healthy at 12.32%. However, the consolidated net profit of ₹5,743.25 crores represents a significant 16.36% sequential decline, falling below the previous four-quarter average. This divergence between revenue and profit growth signals deteriorating operational efficiency.

The profit after tax margin contracted sharply to 27.25% in Q2 FY26 from 31.58% in the previous quarter, a decline of 433 basis points. This compression is particularly notable given that the company's operating margin excluding other income remained elevated at 95.21%. The standalone net profit of ₹7,834.39 crores also declined 12.76% quarter-on-quarter, though it showed resilience with 8.61% year-on-year growth. Interest costs rose to ₹17,314.23 crores from ₹17,203.98 crores, reflecting the higher cost of borrowings in the current rate environment.

The tax rate for the quarter stood at 22.10%, marginally higher than the previous quarter's 19.80%, contributing to the profit decline. Other income dropped dramatically to ₹10.98 crores from ₹89.88 crores in Q1 FY26, representing an 87.78% sequential decline. This sharp fall in non-operating income further pressured overall profitability. Employee costs remained relatively stable at ₹142.24 crores, up slightly from ₹139.01 crores quarter-on-quarter.

Profitability Dynamics: ROE Remains Robust Despite Headwinds

Despite the sequential profit decline, Power Finance Corporation continues to demonstrate strong capital efficiency with a return on equity of 19.53%, significantly above the industry average. This elevated ROE reflects the company's ability to generate substantial returns on shareholder capital, positioning it favourably among peers in the infrastructure finance sector. The average ROE over the past five years stands at 19.37%, indicating consistent profitability.

However, the company's return on capital employed of 9.56% suggests that whilst equity returns are strong, the overall capital base including debt generates more modest returns. With a debt-to-equity ratio of 8.25, Power Finance Corporation operates with high financial leverage, which amplifies returns during favourable periods but also magnifies risks during downturns. The company's book value per share stands at ₹356.77, providing some downside protection at the current market price of ₹380.45.

Balance Sheet Strength: Asset Base Expands

Power Finance Corporation's balance sheet as of March 2025 reflects a robust financial position with shareholder funds of ₹1,17,738.35 crores, up from ₹1,01,146.77 crores in the previous year. The company's reserves and surplus grew to ₹1,14,438.25 crores, demonstrating consistent profit retention and capital accumulation. Fixed assets stood at ₹722.53 crores, whilst investments expanded significantly to ₹12,793.49 crores from ₹10,971.35 crores, reflecting the company's strategic deployment of capital.

Current assets reached ₹66,329.26 crores, up substantially from ₹44,436.76 crores, indicating growing lending activities. However, current liabilities also surged to ₹10,62,033.12 crores from ₹9,39,186.58 crores, reflecting the company's reliance on short-term borrowings to fund its operations. The absence of long-term debt on the balance sheet is notable, suggesting the company primarily utilises short-term funding sources for its lending activities.

Industry Leadership: Valuation Disconnect Persists

Power Finance Corporation's peer comparison reveals a striking valuation anomaly. Despite boasting the highest return on equity at 19.37% amongst its peer group, the company trades at a modest price-to-earnings ratio of 5.24x, significantly below the peer average of approximately 46x. This substantial valuation discount appears unjustified given the superior profitability metrics. The price-to-book value of 1.08x is also reasonable, particularly when compared to peers like HUDCO (2.54x) and CreditAcc. Gram. (3.08x).

The dividend yield of 3.68% positions Power Finance Corporation favourably within the sector, offering income-oriented investors an attractive proposition. However, the company's debt-to-equity ratio of 8.25 is notably higher than most peers, with only HUDCO (5.97) operating with comparable leverage. This high leverage profile explains some of the valuation discount, as it increases financial risk and reduces flexibility during economic downturns. The market capitalisation of ₹1,27,037 crores makes it the second-largest player in the peer group.

Valuation Analysis: Attractive Entry Point Despite Near-Term Concerns

From a valuation perspective, Power Finance Corporation presents an intriguing opportunity. Trading at a price-to-earnings ratio of just 5.24x compared to the industry average of 24x, the stock trades at a significant 78% discount to sector multiples. The price-to-book value of 1.08x suggests limited downside risk, as the stock trades only marginally above its book value of ₹356.77 per share. The PEG ratio of 0.30 indicates the stock is undervalued relative to its growth prospects.

The EV/EBITDA multiple of 10.17x and EV/Sales of 9.88x appear reasonable for an infrastructure finance company with steady cash flows. The dividend yield of 3.68%, backed by a recent dividend of ₹3.70 per share (ex-date August 18, 2025), provides a steady income stream for investors. The valuation grade has fluctuated between "Very Attractive" and "Expensive" over the past month, currently settling at "Attractive" as of November 3, 2025.

However, the current market price of ₹380.45 represents a 27.35% decline from the 52-week high of ₹523.65, though it remains 6.49% above the 52-week low of ₹357.25. The stock's valuation attractiveness is tempered by deteriorating technical indicators and weakening near-term financial momentum, creating a disconnect between fundamental value and market sentiment.

Shareholding Pattern: Institutional Confidence Wanes

The shareholding pattern reveals mixed signals from institutional investors. Promoter holding remains rock-solid at 55.99%, with the President of India maintaining unwavering support. Foreign institutional investors marginally increased their stake by 0.18% to 18.84% in Q2 FY26, suggesting some renewed interest. Insurance companies also raised their holdings by 0.36% to 4.21%, indicating confidence in the long-term prospects.

However, mutual funds reduced their stake by 0.29% to 10.58%, continuing a declining trend from 11.57% in December 2024. Other domestic institutional investors also trimmed positions by 0.15% to 1.25%. The total institutional holding of 34.87% remains substantial but the divergent behaviour between foreign and domestic institutions warrants attention. With 796 FIIs and 36 mutual funds invested, the stock maintains broad institutional coverage, though the net selling by domestic funds raises questions about near-term earnings visibility.

Stock Performance: Bearish Trend Dominates

Power Finance Corporation's stock performance presents a tale of two timelines. Over the longer term, the stock has delivered exceptional returns, generating a staggering 299.80% gain over three years and 396.93% over five years, massively outperforming the Sensex by 263.79% and 298.29% respectively. These stellar long-term returns reflect the company's fundamental strength and the re-rating of public sector infrastructure finance companies.

However, the near-term picture is considerably bleaker. The stock has declined 17.63% over the past year, underperforming the Sensex by 22.25 percentage points. Year-to-date losses stand at 15.13%, whilst the broader market has gained 6.50%. The stock is currently trading below all key moving averages – the 5-day (₹398.78), 20-day (₹399.60), 50-day (₹400.08), 100-day (₹407.07), and 200-day (₹406.53) – a technically bearish configuration. The stock also underperformed its sector by 37.37% over the past year, with the finance sector returning 19.74%.

The technical trend turned decisively bearish on November 6, 2025, at ₹386, following a series of trend changes between mildly bearish and bearish since mid-October. Key technical indicators including MACD, Bollinger Bands, KST, and Dow Theory all signal bearish momentum on weekly and monthly timeframes. The immediate support lies at the 52-week low of ₹357.25, whilst resistance is clustered around the ₹400-407 zone where multiple moving averages converge.

Investment Thesis: Quality Franchise Facing Cyclical Headwinds

Power Finance Corporation's investment thesis rests on several pillars. The company operates in a critical sector, providing financing for India's power infrastructure development, with strong government backing as a Maharatna public sector enterprise. The consistent return on equity above 19% demonstrates superior capital allocation and profitability. The valuation at 5.24x earnings appears attractive relative to both historical levels and peer multiples, offering a margin of safety.

However, several factors temper this optimistic view. The Q2 FY26 results revealed concerning trends with sequential profit decline of 16.36% and margin compression of 433 basis points. The financial trend has been classified as "Flat" by analysts, indicating stagnating momentum. Technical indicators uniformly point to bearish sentiment, with the stock trading below all major moving averages. The high debt-to-equity ratio of 8.25 limits financial flexibility and amplifies risk during economic downturns.

Key Strengths & Risk Factors

Outlook: What to Watch in Coming Quarters

The coming quarters will be critical in determining whether Q2 FY26's profit decline represents a temporary blip or the beginning of a more sustained earnings deceleration. Management commentary on margin outlook, loan book growth, and asset quality will be key factors to monitor. The company's ability to navigate rising interest costs whilst maintaining lending spreads will determine profitability trajectory. Additionally, any policy initiatives supporting infrastructure financing or changes in government capital allocation to the power sector could serve as positive catalysts.