Buy Rural Electrification Corp Ltd For Target Rs.550 by Motilal Oswal Financial Services Ltd
Minor weakness in AUM growth due to higher rundown
Asset quality improves; reported NIM stable QoQ
* Rural Electrification Corp (RECL)’s 3QFY25 PAT grew ~23% YoY to INR40.3b. NII grew ~20% YoY to ~INR51.3b. Other income rose ~260% YoY to~INR2b.
* Opex rose ~78% YoY/~63% QoQ to ~INR3.1b and the cost-to-income ratio was ~5% (PQ: 3.1% and PY: ~4.7%). The sequential jump in opex was mainly due to higher CSR expenses. PPoP rose ~20% YoY to INR50.2b in 3QFY25.
* Yields (calc.) rose ~3bp QoQ to ~10.01%, while CoB increased ~4bp QoQ to ~7.32%, resulting in a largely stable spread QoQ at ~2.7%.
* GS3 improved ~60bp QoQ to ~1.95%, while NS3 improved ~15bp QoQ to ~0.75%. PCR on Stage 3 declined ~3pp QoQ to ~62%. Improvement in asset quality was driven by the complete resolution of Lanco Amarkantak, Nagai Power, and Konaseema Gas Power. Provision write-backs stood at INR890m. This translated into annualized credit costs of -2bp (PY: 1bp and PQ: -3bp).
* The company has 14 projects that are classified as NPA. Resolutions in 13 NPA projects (PCR: 68%) are being pursued under NCLT, while the remaining 1 NPA project (PCR: 50%) is outside NCLT.
* Yields have marginally risen over the past two quarters, driven by higher disbursements to the generation sector. Management guided for NIMs of around ~3.65%-3.7%, going forward. We expect NIMs at ~3.6% each in FY26/FY27 (vs. ~3.7% in FY25E).
* We estimate a CAGR of 20%/17%/14% in disbursement/AUM/PAT over FY24- FY27. We estimate RoA/RoE of 2.6%/20% and a dividend yield of ~5.6% in FY27. Reiterate BUY with a TP of INR550 (premised on 1.4x Sep’26E BVPS).
* Key risks are: 1) rising exposure to private infrastructure projects as these loans fall outside REC’s core business of lending to power projects; 2) increasing exposure to the high-risk power projects without PPAs; and 3) compression in spreads and margins due to intensified competition.
Key highlights from the management commentary
* The share of the private sector in the total lending will gradually increase to ~30% by FY30, as the proportion of renewable projects increases.
* Asset quality has improved primarily from resolutions of stressed assets viz. Lanco Amarkantak, Nagai Power, and Konaseema Power, with a total outstanding exposure of ~INR28b.
* There has been a delay in the signing of PPAs for renewable energy by the implementing agency (like NHPC, NTPC, and SECI), which is delaying the funding to RE projects by REC.
* Management expects a provision reversal of ~INR22b from the four stressed assets that are in the advanced stages of resolution. Resolutions of these exposures are expected by Dec’25.
Valuation and view
* RECL reported a decent quarter, marked by healthy disbursement growth, though AUM growth exhibited a minor slowdown due to higher repayments during the quarter. Repayments were higher in distribution and RE projects. Asset quality continues to improve, supported by the resolution of stressed assets, while NIMs remained largely stable sequentially.
* REC trades at 1x FY27E P/ABV, and we believe that risk-reward is attractive considering a healthy earnings growth and 20%+ RoE.
* REC is well equipped to achieve a loan book CAGR of ~17% and a PAT CAGR of ~14% over FY24-FY27. We estimate RoA/RoE of 2.6%/20% and a dividend yield of ~5.6% in FY27. Reiterate BUY with a TP of INR550 (premised on a target multiple of 1.4x Sep’26E P/ABV).
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