Why Elara sees dream run for REC shares to continue; stock up 280% in 1 year

Shares of REC Ltd are up 286 per cent in the last one year but  if one goes by Elara Securities, REC's dream run may continue, led by high double-digit growth visibility, steady margin in tight funding milieu and sizeable write-backs, which it believes may lead to high 18-19 per cent return on equity (RoE) and 2.9 per cent return on assets over FY24-26.

The brokerage said it has raised its FY24-26 EPS estimates by 5-9 per cent. Riding on upbeat industry trend and GoI backing, REC may create further "indestructible value for shareholders." The brokerage suggested a target price of Rs 582 on the sock from Rs 420).

Barring high one-offs in Q2 (Rs 520 crore with respect to reversals, dividend income), REC’s Q3 earnings were strong on all  counts, the brokerage said.

"This was led by a 16 bps QoQ NIM uptick, on strong  disbursements (up 11 per cent QoQ) and steady CoF at 7.28 per cent sequentially, led by favorable liability mix; provisions at mere Rs 60 crore with resolutions of three assets; and decadal-high 21 per cent YoY loan  growth largely led by renewables, LPS, infra portfolios. RECL is upbeat  on growth guidance of 16 per cent YoY, NIM steadying at 3.5 per cent and anticipated  provision reversal for FY24, which signal strong book value accretion and continued robust upside for the stock," Elara Securities said,

Elara said REC continues to prop talent, skillset and effective pricing, focusing on state-backed assets, quality renewable corporates, government-led rooftop solar loan and high-ticket infra projects. It expects a higher 18 per cent loan CAGR in FY24E-26E.

"Sturdy asset resolutions, more to follow; expect write-backs in FY24 NIM may be steady ahead as RECL seeks to contain credit cost (aim is 0 per cent net NPA by FY25). RECL did not see any slippage in the past eight quarters. It expects a write-back in FY24. Stage 3 assets of 2.78 per cent were at six-year low  in Q3. Currently, 16 stressed projects (Rs 13,800 crore) are in Stage III, of which  for three (Rs 1,510 crore), resolution is being pursued outside NCLT and for 13 (Rs 12,300 crore) within NCLT. Q3 saw three asset resolutions – Meenakshi, DANS Energy, Classic Global. With more in pipeline (TRN  Energy, Badreshwar, Lanco, Nagai), expect 2-2.4 per cent GNPA in FY24E-26E," it said.