Recommendation from Finance Term Lending sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

REC: PLACED IN A POWERFUL POSITION

HERE IS WHY
✓   Increasing demand for power
✓   Maintaining consistent profit margins
✓   Sanctioned projects worth USD 5 billion

I ndia’s power sector is undergoing a transformative shift, aiming to replace half of its installed capacity with non-fossil fuel sources by 2030, promoting sustainable integration into the national smart grid. Due to intermittent renewable energy resources and a lack of natural gas, the government will rely on coal-based power for base load capacity, with additional coal capacity only in brownfield projects. The government plans to bring 94 GW of coal capacity online by 2032, with approvals expected within the next 2-3 years.

With power demand rising by 8 per cent last year and 11 per cent in April, our recommended scrip for investment is REC Ltd. Established in 1969, REC is a Navratna company under the Ministry of Power, funded by market borrowings and foreign borrowings. Under the leadership of experienced professionals, the company has maintained consistent profit margins and paid dividends since 1998. The company has been appointed as a nodal agency by the Government of India for the implementation of Saubhagya and DDUGJY schemes.

It is also responsible for rolling out UDAY to reform and financially turn around power distribution companies. REC offers financial services to entities across the power sector value chain, assisting in setting up power infrastructure, operational efficiency, and implementing innovative technology solutions. In Q4FY24, on a consolidated basis, its revenue increased by 24.89 per cent YoY to ₹12,619.72 crore compared to ₹10,104.49 crore from the previous year’s same quarter. On a sequential basis, its revenue increased by 5.27 per cent. The PBIDT excluding other income increased by 26.07 per cent to ₹13,101.73 crore YoY as compared to ₹10,392.16 crore from the previous year’s same quarter, while sequentially increasing by 10.92 per cent. Its net profit stood at ₹4,079.09 crore compared to ₹3,065.37 crore, a YoY increase of 33.07 per cent, sequentially increasing by 23.29 per cent from ₹3,308.42 crore. The company aims to increase its renewable energy portfolio to 30 per cent by 2030, with a target of 10-fold growth to USD 40 billion.

The company has sanctioned projects worth USD 5 billion in FY23-24, with a total asset under management of USD 6 billion. The government has initiated diversification into non-power infrastructure logistics, identifying a need for additional coal-based capacity by 2032. The company is planning to raise green bonds to cater to green projects only. The government is committed to making enabling provisions for infrastructure development, and the cost of funds has decreased from 7.28 per cent to 7.13 per cent. The company is also aiming to reach ₹10 lakh crore loan book by FY30 and expects growth in conventional generation, distribution and transmission sectors.

Currently, the shares of REC are trading at a PE of 11.5 times whereas the industry PE stands at 30 times. If we look at its PBV it is currently at 2.33 times, which is higher than the industry PBV of 2.28 times. The company has a return on assets (ROA) value of of 2.79 per cent. If we look at the company’s last three-year profit and sales CAGR, it stands at 19 per cent and 10 per cent, respectively. The company has a three-year average return on equity of 21.3 per cent and a return on capital employed (ROCE) of 9.43 per cent. Considering the aforementioned factors, we recommend BUY,