REC Q1 earnings hold up on write-backs as loan growth and margins weaken

Investment View and Valuation

Motilal Oswal Financial Services Limited (MOFSL) characterises REC’s Q1 FY27 performance as weak, although reported earnings were in line with estimates because of a sizeable provision write-back. The broker reiterates its Buy rating and Rs 435 target price, based on 1.1 times FY28E book value per share.

MOFSL considers REC attractively valued at 1.0 times FY27E price to adjusted book value. However, sustained weak loan growth and margin pressure remain the principal issues to monitor.

Q1 FY27 Financial Performance

REC reported Q1 FY27 profit after tax (PAT) of Rs 41.5 billion, down approximately 7 per cent year on year and in line with MOFSL’s estimate. Net interest income declined about 2 per cent year on year to Rs 54.4 billion, also in line with estimates.

Pre-provision operating profit fell approximately 16 per cent year on year to Rs 42.5 billion, around 20 per cent below the broker’s estimate, primarily because of elevated exchange losses. Other income was negative Rs 1.5 billion and included a Rs 3 billion net loss on investments and an exchange loss of Rs 9.1 billion, compared with Rs 942 million in the preceding quarter and Rs 515 million a year earlier. Fee and commission income was Rs 1.1 billion.

Operating expenditure declined 11 per cent year on year to approximately Rs 1.2 billion, 54 per cent below estimate. The cost-to-income ratio stood at 2.3 per cent.

Provision Write-Back and Asset Quality

A provision write-back of Rs 9.6 billion, compared with MOFSL’s expected Rs 1 billion write-back, supported PAT and resulted in annualised credit costs of negative 16 basis points.

Asset quality remained stable, with gross Stage 3 assets at approximately 0.23 per cent, net Stage 3 at 0.11 per cent and Stage 3 provision coverage at about 51.2 per cent. Provision coverage on standard assets, comprising Stage 1 and Stage 2, declined approximately 20 basis points sequentially to 0.85 per cent and drove the write-back.

Capitalisation remained strong, with the capital adequacy ratio (CRAR) at approximately 23.1 per cent as of June 2026. REC also declared its first interim dividend of Rs 4.25 per share.

Loan Growth and Margins

Growth was subdued. REC’s loan book stood at Rs 5.9 trillion, up only about 1 per cent year on year and broadly flat sequentially. Q1 FY27 disbursements fell 43 per cent year on year to Rs 337 billion, although repayments moderated to 18.8 per cent from 30.2 per cent in the preceding quarter.

Renewable loans grew 23 per cent year on year to Rs 786 billion and accounted for approximately 13 per cent of the overall loan mix. Yield on loans declined around 5 basis points sequentially to 9.55 per cent, while the cost of borrowings declined around 20 basis points to 6.9 per cent. This lifted calculated spreads by around 15 basis points to 2.63 per cent.

Despite the improvement in calculated spreads, reported net interest margin contracted around 40 basis points year on year to 3.34 per cent.

Earnings Outlook

MOFSL expects REC to maintain net interest margin near 3.7 per cent in FY27E and FY28E. The broker models credit costs of approximately 20 basis points over FY27E to FY28E and forecasts loan and PAT compound annual growth of 9 per cent and 3 per cent, respectively, over FY26 to FY28E.

The broker revised FY27 EPS upward by about 3 per cent to reflect higher provision write-backs, but cut FY28 EPS by 3 per cent because of lower loan-growth assumptions. It forecasts FY28E return on assets of 2.4 per cent and return on equity of 17 per cent.

Key Risks

• Prolonged weak loan growth.
• Compression in spreads or margins amid high competition.