Foreign brokerage CLSA on Monday upgraded REC Ltd to 'high-conviction outperform' for its best in class loan growth, return on equity, and high dividend yield. The brokerage said the PSU stock is trading at mere 0.93 times its FY27 book value, which it finds attractive. That said, given that the REC is likely to report mid-teens growth going ahead rather than 20 per cent, CLSA reduced its target on the stock to Rs 525 against Rs 590 earlier.
Following the development, the stock rose 5.47 per cent to hit Rs 380 level on BSE. Despite this, the stock is down 25 per cent for 2025 so far.
REC's loan growth over the past 5-7 quarters has been exciting at 15-21 per cent. As discom disbursals peak, CLSA is now focusing on pending sanction book. It said 55 per cent of the past 2.75 years of sanctions stand undisbursed, primarily in the genco, renewable and infrastructure segments, in spite of all the process-related slowdowns. This sanction pool alone could lead to double-digit to rid-teen loan growth per FY26-27, CLSA said.
With no slippage over the past 2-3 years and control of approvals/agreements in projects, CLSA said it is less concerned about asset quality during this capex cycle.
"Best in class loan growth, ROE and dividend yield places REC apart from others, but the stock is trading only at a 0.93x adjust PB FY27CL Accordingly we upgrade our rating from O-PF to HC O-PF on a lower Rs525 target price (from Rs 590) based on a 1.3 times FY27 adjusted BV," CLSA said.
The foreign brokerage said 55 per cent of sanctions undisbursed implies double-digit growth.
REC's bad assets touched 7.2 per cent at its peak in the last bad cycle. With gross NPAs down to 2 per cent in December 2024, it is back to pre-FY16 levels (pre-crisis).
There have been no new slippage since FY22, which CLSA said is very encouraging. The management's cautious stance and majorly financing of government-owned projects also lends CLSA comfort.
CLSA said the concern over renewable asset quality should be low, given its limited exposure to merchant power projects. "Among large lenders, REC stands out with better delivery on loan growth expectations (15 per cent versus 12-14 per cent for others), ROE (19-20 per cent versus 13-15 per cent for others) and dividend yield (3.5 per cent versus 0-3 per cent for others)," CLSA said.
"Unlike its parent, REC's top management in a few instances have been outsiders, and are all high-quality professionals with a strong track record after REC as well," CLSA said.
CLSA said as it revised its FY25 estimates for higher her standard asset provisions, it changed its FY26-27 loan growth and asset quality forecast, and lowered its FY25/27 EPS by 6 per cent each.
"We trim our target PB as we now expect the company to see mid-teen rather than 20 per cent growth. Elongated timelines on project approvals and R&I project financing guidelines (deferred by 1 year) are risks," it said.