Buy REC Ltd For Target Rs 440 By Emkay Global Financial Services Ltd
RECL reported a visibly weak set of numbers in Q4FY26, with anemic gross loans growth (~3% QoQ/~0.3% QoQ) and elevated credit costs (~40bps) leading to a miss versus consensus/our estimates. However, a confluence of one-offs in the quarter (and during the year) explains this weakness, including
1) The elevated prepayments of ~Rs500bn in FY26 on account of Kaleshwaram, RBPF, ACME, Adani group companies, etc and the Rs63bn reduction in GS3 assets explain the ~10% in growth
2) Credit cost elevated on account of higher Standard Assets provision on new loans owing to implementation of the Reserve Bank of India (Project Finance) Directions, 2025 from 1-Oct-25, requiring 1% provisioning instead of 0.4%, and Ind AS 109 related provisioning on undrawn exposures to sanctioned projects (Rs2.73bn in Q4FY26). Adjusting for such one-offs, FY26 performance in terms of profitability still looks impressive and growth stable. Building in the slightly elevated cost of funding leading to margin compression and more normalized credit cost (~25bps), the company is expected to deliver 16-17% RoE. We reiterate BUY on the stock while revising up Mar-27E TP by ~7% to Rs440 from Rs410, implying FY28E P/B of 1.1x.
Prepayments weigh on growth; regulatory impact inflates credit costs
The accelerated prepayments (Rs500bn in FY26) and resolution of stress assets have continued in Q4, with around 5 projects (~Rs13.98bn technical write-off) and Sinnar Thermal (~Rs23bn) leading to muted growth in gross assets to Rs5.84trn. Weaker trends in disbursement due to reduced disbursement in the RBPF scheme further dampened the asset growth. Margins witnessed a slight compression likely on account of 1) some moderation in yields due to improved rating of DISCOMS; and 2) increased cost of hedging. Credit cost in the quarter seems elevated mainly on account of RBI provision norms on standard assets (~Rs83bn) and Ind AS 109 related provisioning on undrawn exposures to sanctioned projects (~Rs29.8bn) despite write-back of ~Rs57bn from the resolution of the Sinnar Thermal and Biomass Power Projects (Exhibit 2).
Structural story unchanged; reiterate BUY
Growth momentum remains somewhat constrained, largely due to slower disbursements and higher prepayment. We expect AUM to gradually recover, as thermal project execution picks up and renewable-led opportunities continue to scale up. On asset quality, the company continues to exhibit a strong performance, with credit-impaired assets declining sharply and the resolution process almost complete. Going forward, we estimate credit costs to normalize at ~25bps in a stable operating environment. From a margin perspective, some pressure persists due to elevated COFs and moderating yields. Overall, despite near-term growth headwinds, the business remains fundamentally strong. To reflect the Q4 developments, we adjust our estimates; this results in a ~2- 6% cut in EPS over FY27-28E. We reiterate BUY while nudging up Mar-27E TP by ~7% to Rs440, implying FY28E P/B of 1.1x.
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