Buy REC Ltd for the Target Rs 440 by Emkay Global Financial Services Ltd
REC reported a muted starter to FY27, with subdued loan book growth (~1% yoy/qoq) due to lower disbursements of Rs337bn (the lowest in 12 quarters). PAT came in above our and street estimates, mainly due to a reversal in ECL provision (total ECL provision in 1QFY27 stood at 0.98%, down 20bps sequentially), which could be on account of improved DISCOM ratings, whereas headline asset quality was stable, with GS3/NS3 at 0.23%/0.11%. Margins continued to compress on lower yields (attributable to the increasing share of the renewable book and improving DICOM ratings), partly offsetting the benefit of moderating COF. Opex was elevated due to significant hedging losses of Rs9.1bn. The Board approved the draft scheme of merger by absorption into PFC in Jun-26, at 88 PFC shares for every 100 REC shares, with an appointed date of 1-Apr-27, subject to regulatory, shareholder, and creditor approvals. Factoring in the quarterly performance, we marginally tweak our growth and earnings estimates, resulting in FY27-29E EPS contracting ~2-4%. Looking ahead, we expect REC to maintain steady returns of ~16-17%; we maintain BUY and unchanged Jun-27E TP of Rs440, implying an FY28E PBV of 1.2x.
Weak disbursements weigh on growth
Disbursements in 1QFY27remained weak a 12-month low mainly due to weak disbursements to DISCOMs and RE. Repayment pressure eased, with quarterly repayment of ~4.7% vs 7.5% qoq but was not enough to support loan book growth. Margins compressed to 3.34% in 1QFY27 vs 3.43 (FY26) due to significant moderation in yields to 9.55% vs 9.95% (FY26), partly offsetting the ~32bps moderation in COF. This drop could primarily be attributed to the improving ratings and financial health of distribution companies and increasing competition in the renewal segment. Additionally, given the company’s higher exposure to foreign borrowing (~27%; 99% hedged) and FX market volatility, hedging cost was significantly higher at Rs9.1bn. The company also reversed provisions on standard assets (Stage 1) from 1.05% to 0.84%, resulting in a provision reversal and negative credit cost.
Structural story unchanged; maintain BUY
While REC is facing some temporary speed bumps, with slower lending and tighter profit margins, the underlying business is stable. Asset quality remained excellent, with bad loans (Gross Stage 3 and Net Stage 3) holding steady qoq at just 0.23% and 0.11%, respectively. On the back of this strong loan quality, REC benefited from provision writebacks, while we expect credit cost to normalize going forward. Adding to outlook is a major upcoming structural shift the Board recently approved a draft merger with Power Finance Corporation (PFC) Limited, targeted for Apr-27, which will give shareholders 88 PFC shares for every 100 REC shares held. To reflect the 1Q developments, we adjust our estimates (Exhibit 2) and reiterate BUY with an unchanged Jun-27E TP of Rs440, implying an FY28E PBV of 1.2x.
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