Elara Securities retains 'Buy' rating on REC, sets targets at Rs 650 for PSU stock

Rural Electrification Corporation (REC) reported underwhelming Q4 earnings, prompting Elara Securities to adjust its EPS estimates slightly downward due to lower growth expectations. REC's strong cost savings managed to offset elevated provisions, boosting the company's profit after tax (PAT) to Rs 4,236 crore, marking a 5% increase both quarterly and annually. The net interest income (NII) saw a significant rise of 21.1% quarter-on-quarter and 37.6% year-on-year, largely due to a one-off recovery from KSK Mahanadi worth INR 976 crore. Without this recovery, NII would have remained flat, reflecting the challenges faced by the company.

REC's net interest margin (NIM) exceeded 3.63% for the fiscal year 2025, a 6 basis point increase year-on-year. The company aims to maintain healthy margins between 3.6% and 3.75% in FY26, supported by low costs from external commercial borrowings, which constitute about 33-34% of borrowings. Despite robust margins, loan growth has decelerated below 15%, leading to a reduction in EPS estimates by Elara for FY26 and FY27 by 0.8-2%.

The loan book stood at Rs 5.6 lakh crore , an increase of 11.3% year-on-year but flat compared to the previous quarter due to high prepayments. These prepayments amounted to Rs 37,000 crore from entities like Maha DISCOM and Adani. Renewable and transmission loans showed growth, with renewable disbursements increasing by 36% quarter-on-quarter.

REC witnessed a reduction in gross non-performing assets (GNPA) to 1.35% from 2.71% the previous year, while net NPA (NNPA) decreased to 0.38% from 0.9%. The company achieved this through Rs 3,400 crore in stressed asset recoveries and resolved five projects worth Rs 6,000 crore. REC continues to target net zero NPA by FY26, expecting further recoveries from its resolution pipeline.

Elara Securities maintains a Buy recommendation on REC, valuing the company at 1.5 times its FY27 expected price-to-asset-book value, with an unchanged target price of Rs 650. However, the brokerage prefers HUDCO over REC due to higher growth potential and return on equity.

REC's long-term growth prospects remain steady, supported by a 12% annual growth rate and an 18% return on equity. Despite the slowing growth rate, REC remains positioned as a stable compounder in its sector. The company is focusing on ramping up thermal disbursements, converting large renewable energy sanctions, and RDSS-related capital expenditures to support future growth.

Overall, REC continues to benefit from strategic recoveries and nimble liability management, despite facing challenges from a high asset base and elevated repayments. The company's outlook remains stable, with no major new stress anticipated in the near term.