Buy REC Ltd for Target Rs.650 by Elara Capitals
Re-rating triggers spent
Rural Electrification Company’s (RECL IN) Q4 earnings were underwhelming. A high base and higher repayments dented growth but one-off recoveries lifted NII. Benefits from recoveries in two accounts were neutralized by increased Stage 2 provisions on certain accounts. While growth guidance has been lowered to 12% annual, select renewables, sizeable generation project pipeline and RDSS-led distribution disbursements should continue to aid traction. Nimble liability management continues to support earnings profile. RECL now is a steady compounder. While we maintain BUY on modest valuation, we prefer HUDCO (Buy; TP: INR 361), which offers high growth with high RoE potential.
Q4 earnings underwhelming; EPS estimates cut slightly on lower growth: Cost savings offset elevated provisions, thus boosting PAT to INR 42.36bn (up 5% each QoQ/YoY). The rise in PAT was also an outcome of higher NII (up 21.1% QoQ /37.6% YoY) led by one-off element (KSK Mahanadi recoveries at INR 9.76bn). Excluding this, NII would have been flat. NIM crossed 3.63% (up 6bps YoY) in FY25 and RECL is confident that healthy margins will be maintained at 3.6-3.75% in FY26, primarily led by low cost from ECBs (33-34% of borrowings). But loan growth trends have decelerated below 15%. So, we pare FY26E-27E EPS 0.8-2%.
High base, high repayments dent growth: Loan book stood at INR 5.6tn, up 11.3% YoY but flat QoQ due to elevated prepayments, including INR 370bn from Maha DISCOM, Adani and RBPFlinked loans. STL/MTL and Renewables grew 14% and 11% QoQ, respectively, shifting the mix toward Renewables (10.2% versus 9.3% QoQ). Disbursements were INR 455.4bn, down 16.7% QoQ but up 15.7% YoY. Renewable disbursements grew 36% QoQ, while Transmission rose 221% QoQ on a low base. YoY growth was led by Generation (+79%), Distribution (+65%), and STL/MTL (+40%). Sanctions were strong, with no RBPF exposure, supporting future growth. Growth outlook is buoyed by ramp-up in thermal disbursement, large RE sanction conversions, and RDSS-related capex. AUM growth of 12% will be supported by initiatives that promote early project completion and refinancing
Robust recoveries – Trend sustained: GNPA fell to 1.35% (2.71% last year) and NNPA to 0.38% (from 0.9%), led by INR 34bn in stressed asset recoveries and resolution of five projects worth INR 60bn in FY25. Of 16 NPAs, five were resolved (~71% recovery) and 12 remain (11 in NCLT: INR 60bn, 77% provisioned; one outside NCLT: INR 15bn, 50% provisioned). PCR is ~72%. Stage I and II provisioning rose from 60bps to 132bps. Outlook is stable with no material new stress. RECL is targeting net zero NPA by FY26 (expect INR 8-10bn recovery from resolution pipeline).
Reiterate BUY on downward NPA cycle: We pare ESP estimates by 0.8%/1.9% for FY26E/27E, on lower growth. We introduce FY28. Growth run-rate has slowed on a high asset base and recoveries. Healthy NIMs continue to aid earnings. RECL is now a steady compounder with long-term growth of 12% and RoE of 18%. While we maintain BUY on underlying sectoral trends and NPA downcycle, we do not see a major re-rating trigger. So, we maintain BUY, valuing RECL at 1.5x FY27E P/ABV for an unchanged TP of INR 650. Prefer HUDCO over RECL
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