REC Ltd Achieves 30% YoY Growth in Net Interest Income for Q1FY25

About the Stock:

REC Ltd., formerly known as Rural Electrification Corporation Limited, is an Indian government-owned public sector company under the Ministry of Power. Established in 1969, REC Ltd. was initially tasked with funding and promoting rural electrification initiatives throughout India. Over time, the company’s scope has expanded to include funding projects related to power generation, transmission, and distribution in both urban and rural areas. REC Ltd. has consistently demonstrated strong financial performance, characterized by solid profitability, liquidity, and solvency. The majority of its revenue comes from interest income on loans to companies within the power sector, supported by a robust capital structure.

Price Performance:

Industry Overview:

The power sector has thrived during the post-pandemic recovery phase, driven by increased demand and a focus on energy transformation. In the fiscal year 2023–2024, total power generation reached 1,738 BU, representing a 7% increase compared to the previous year. However, renewable energy sources, including hydropower, accounted for 364 BU, marking a 2.2% year-over-year decrease. Notably, large hydro generation experienced a significant 17.8% slowdown despite a 10.9% increase in renewable energy generation. Total power generation from non-fossil fuels stood at 412 BU, a 1.4% decrease from the prior year, resulting in non-fossil energy comprising 24% of the total. Additionally, the fiscal year saw a 26 GW increase in installed electricity capacity, bringing the total to 442 GW by the year’s end. Remarkably, renewable energy accounted for 73% of the new capacity. The non-fossil capacity share increased from 43% to 45% year-over-year, with peak power consumption reaching a record-breaking 240 GW, up from 215.9 GW the previous year.

Q1FY25 Financial Performance Analysis:

In Q1FY25, REC Ltd. reported a 19% year-over-year growth in total income, rising from INR 10,981 crores in Q1FY24 to INR 13,037 crores. This impressive growth is likely due to an expanded loan book and higher interest revenue, reflecting the company’s strong operational performance. Net interest income (NII) increased by 30% YoY, from INR 3,612 crores in Q1FY24 to INR 4,713 crores in Q1FY25, underscoring REC Ltd.’s ability to effectively manage interest rates and boost lending income.

REC Ltd.’s net profit grew by 16% YoY to INR 3,442 crores in Q1FY25, up from INR 2,961 crores in Q1FY24, highlighting its strong profitability driven by increased revenue and lower expenses. Total comprehensive income, which includes net profit and other comprehensive income, rose by 12% YoY to INR 3,525 crores in Q1FY25, further demonstrating the company’s enhanced equity value and overall financial health.

Disbursements:

Sanctions:

The company’s loan book exhibited robust growth, increasing by 17% YoY from INR 4.54 lakh crores in Q1FY24 to INR 5.30 lakh crores in Q1FY25. This expansion indicates REC Ltd.’s successful operations and its ability to finance major projects. Moreover, asset quality improved as net credit-impaired assets declined from 0.97% YoY to 0.82% of total assets in Q1FY25, reflecting better credit risk management and effective recovery procedures.

REC Ltd.’s net worth significantly increased from INR 60,886 crores in Q1FY24 to INR 72,351 crores in Q1FY25, representing a 19% YoY rise. This growth indicates a strong equity foundation, enhancing the company’s financial stability. The capital adequacy ratio (CAR) for Q1FY25 was a robust 26.77%, well above the regulatory requirement. With Tier I at 24.27% and Tier II at 2.50%, this solid CAR highlights REC Ltd.’s strong capital structure and its capacity to absorb losses while expanding its business.

In summary, REC Ltd.’s Q1FY25 results demonstrate solid and well-managed financial performance, marked by significant growth in revenue, profitability, and asset quality. The company’s strategic focus on expanding its loan book and efficient cost management has led to improved interest rates and net interest margins.

Over the past seven quarters, from December 2022 to June 2024, the financial institution’s asset quality has steadily improved. Gross credit-impaired assets have consistently decreased, from 3.63% in December 2022 to 2.61% by June 2024, indicating a substantial reduction in the risk associated with the loan portfolio. Similarly, net credit-impaired assets, which consider impairments after provisions, have significantly declined from 1.12% in December 2022 to 0.82% by June 2024, showcasing effective provisioning and recovery efforts.

Borrowings:

During the same period, the provision coverage ratio, which measures the extent to which provisions cover impaired assets, fluctuated. It started at 69.11% in December 2022, peaked at 70.64% in March 2023, and then slightly dipped before stabilizing in the subsequent quarters at around 68-70%. While the ratio remains relatively high, the slight decline towards the end suggests that even as the bank’s asset quality improves, it may be slightly reducing its provision buffer, possibly due to increased confidence in asset quality.

The yield on loan assets for Q1FY25 was 9.99%, slightly higher than the 9.82% recorded for Q1FY24. This yield stability indicates that REC Ltd. has maintained profitability in its lending operations, whether through favorable changes in loan terms or a stable interest rate environment.

Key Ratio & Analysis:

In Q1FY25, the cost of funds decreased to 7.05%, down from 7.23% in Q1FY24. This reduction in financing costs may be attributed to better debt management or favorable borrowing terms, thereby enhancing the company’s profitability.

The interest spread, which is the difference between the cost of funding and the yield on loan assets, improved from 2.59% in Q1FY24 to 2.94% in Q1FY25. This suggests that REC Ltd. has increased the margin between what it pays for funds and what it earns on loans, indicating more profitable lending operations.

The net interest margin (NIM) grew to 3.64% in Q1FY25, up from 3.28% in Q1FY24. The growth in NIM, a critical indicator of a company’s profitability, demonstrates REC Ltd.’s effective allocation of interest income against its interest expenses.

Return on net worth (RoNW) decreased slightly from 19.98% in Q1FY24 to 19.51% in Q1FY25. Although the decline is minor, it suggests a slight drop in the company’s return on equity, possibly due to slower net income growth or an expanded equity base.

During Q1FY25, the interest coverage ratio remained steady at 1.54 times, compared to 1.53 times in Q1FY24. This stability indicates consistent performance in managing the company’s debt obligations, demonstrating its ability to meet interest commitments from earnings.

The debt-to-equity ratio in Q1FY25 was 6.27 times, slightly lower than the 6.42 times noted in Q1FY24. A lower ratio indicates that REC Ltd. has marginally reduced its reliance on debt financing, leading to a more balanced capital structure.

Future Outlook:

REC Ltd. is strategically positioned as a key financier of power infrastructure projects across India. Given the Indian government’s ambitious infrastructure development plans, including rural electrification and renewable energy expansion, REC Ltd. is expected to continue playing a crucial role in funding large-scale power projects. The government’s commitment to achieving universal electricity access and enhancing the reliability of power supply, particularly in rural and underserved areas, ensures a steady flow of projects and opportunities for REC Ltd.

As India strives to meet its renewable energy targets, REC Ltd. is likely to focus more on financing projects related to solar, wind, and other renewable energy sources. This shift aligns with global trends and India’s commitments under international agreements like the Paris Accord. By supporting the transition to a greener energy mix, REC Ltd. can diversify its portfolio and position itself as a leader in financing sustainable energy projects, potentially enhancing its reputation and attracting new business.

REC Ltd. has consistently demonstrated strong financial performance, driven by the size of its loan portfolio, steady revenue growth, and profitability. The company’s sound financial management practices and substantial capital base provide a solid foundation for future growth. As India’s economic development, urbanization, and industrialization progress, REC Ltd.’s loan disbursements are expected to increase, further boosting profitability and shareholder value.

Conclusion

REC Ltd. is well-positioned to benefit from India’s ongoing infrastructure and energy development initiatives. Its strong financial base and focus on funding critical power projects contribute to a positive long-term outlook. However, the company must navigate sector-specific challenges and adapt to evolving market conditions to sustain its growth trajectory.

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