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Indestructible value creation

Optically low PAT given one-offs in Q2; NIM/growth surprise

Barring high one-offs in Q2 (INR 5.2bn with respect to reversals, dividend income), REC’s (RECL IN) Q3 earnings were strong on all counts. This was led by: (a) 16bps QoQ NIM uptick, on strong disbursements (up 11%QoQ) and steady CoF at 7.28% sequentially (7.23%: Q2), led by favorable liability mix (~41% borrowings from corporate bonds; 9% from capita gain bonds – amongst only one in four to raise these – being priced favorably); (b) Provision at mere INR 0.6bn with resolutions of three assets; and (c) decadal-high 21% YoY loan growth largely led by renewables, LPS, infra portfolios. RECL is upbeat on growth guidance of 16% YoY, NIM steadying at 3.5% and anticipated provision reversal for FY24, which signal strong book value accretion and continued robust upside for the stock.

Renewables, non-power prop loan; sanction pipeline strengthens

RECL saw robust loan growth of 4.9% QoQ/21% YoY, led by infra loans (up 46% QoQ), renewables (up 11.5% QoQ/30.5% YoY). Renewables at 6.7% of assets (~INR 333bn) may climb to INR 3tn by FY30E, led by the recent INR 280bn MoU signage and the government’s agenda to take the share to 30% of mix by FY30. Also, Q3 saw 57% of overall sanctions from renewables. RECL continues to prop talent, skillset, effective pricing, focusing on state-backed assets (DISCOMs led by RBPF loans), quality renewable corporates, GoI-led rooftop solar loan (estimated INR 300bn funding opportunity) and high-ticket infra projects, propping business visibility. Expect higher 18% loan CAGR in FY24E-26E.

Sturdy asset resolutions, more to follow; expect write-backs in FY24

NIM may be steady ahead as RECL seeks to contain credit cost (aim is 0% net NPA by FY25). RECL did not see any slippage in past eight quarters. It expects write-back in FY24. Stage 3 assets of 2.78% were at six-year low in Q3. Currently, 16 stressed projects (INR 138bn) are in Stage III, of which for three (INR 15.1bn), resolution is being pursued outside NCLT and for 13 (INR 123bn) within NCLT. Q3 saw three asset resolutions – Meenakshi (INR 7bn), DANS Energy, Classic Global. With more in pipeline (TRN Energy, Badreshwar, Lanco, Nagai), expect 2-2.4% GNPA in FY24E-26E.

Valuations: Maintain BUY; TP raised to INR 582

Despite run-up to ~1.5x FY25E P/ABV, RECL’s dream run may continue led by healthy earnings CAGR given high double-digit growth visibility, steady margin in tight funding milieu and sizeable write-back leading to high 18-19% RoE and 2.9% RoAs in FY24-26E. We lift FY24E/25E/26E estimate 5-9% each. Riding on upbeat industry trend and GoI backing, RECL may create further indestructible value for shareholders. BUY – We up TP to INR 582 (from INR 420), on 1.9x FY25E P/ABV (from1.4x).

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