Buy REC Ltd for the Target Rs.525 by Emkay Global Financial Services Ltd
REC reported a good set of numbers in Q1FY26. NIM at 3.74% and RoNW at 22% improved YoY and came in ahead of our estimates. The gross loan book grew ~10% YoY to Rs5.84trn; adjusting for ~RS 77bn NPAs resolved over the past 12 months, growth stands at ~12% YoY. A Rs 2.92 bn provision writeback from the TRN Energy resolution and reversals on standard asset provisioning due to SEB upgrades led to a negative credit cost of Rs 6.17 bn, partially offset by Rs 5.76 bn losses on hedging derivatives. Asset quality improved further, with GS3 and NS3 ratios falling to 1.05% and 0.24%, respectively. REC’s Q1 results were solid across most parameters. Currently trading at ~1x FY27E P/B, REC offers sustainable ~18-19% RoE, ~11-12% AUM growth, and ~5% dividend yield. We reiterate BUY with a Jun-26E TP of Rs 525.
Profitability and asset quality impress In Q1FY26, REC reported +2bps YoY improvement in interest spread to 2.96%, 10bps YoY improvement in NIM to 3.74% and 3.12ppts YoY improvement in Return on Net Worth to 22.63%. Q1FY26 credit cost was negative Rs 6.17bn (or ~-43bps), driven by an ECL provision reversal of Rs 2.92bn on TRN Energy NPA (Rs 15bn) resolution, partial reversals in standard asset provisions on account of rating upgrades of some state utilities, and potential loan upgrades from Stage 2 to Stage 1 for certain state utilities. However, the hedging-related MTM losses of Rs5.76bn in the quarter nearly offset the benefit from the negative credit cost. Sustained NPA resolutions and absence of new slippages ensured that asset quality continued to improve with GS3/NS3 hitting a new low of 1.05%/0.24% (11 accounts with Rs 61.5bn outstanding and 77% PCR).
NPA resolution makes growth look optically weaker At ~10.5% YoY, the gross loan growth appears less impressive. Seasonality, delayed execution of government schemes, expected completion of some government schemes, and slower revival in conventional generation explain the temporary growth slowdown versus ~12-13% medium-term guidance. Several NPA resolutions in the last 12 months explain ~Rs 77bn reduction in gross loans and adjusted loan growth is ~12% YoY. Sanctions/disbursements had seasonal effects.
Risk-reward favorable; reiterate BUY With loan growth moderation, RECL shares have materially underperformed the broader market (RECL: -33% vs NIFTY50: +3%) in the last year on the back of loan book growth moderation. Even in a moderate growth scenario (~11-12% loan growth), the company is well-positioned to deliver ~18-19% RoE (building in normalized credit cost and some NIM compression) and ~5% dividend yield (on current prices). With these return metrics, asset quality position, and strong outlook, the risk reward is favorable with RECL shares trading at FY27E P/B of ~1x. We reiterate BUY with Jun-26E TP of Rs525.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
