Motilal Oswal Financial Services has reiterated a BUY rating on Rural Electrification Corporation (RECL), emphasizing stable asset quality, consistent earnings growth, and a robust future loan book expansion. Despite muted loan growth in the first half of FY26 due to elevated repayments, management projects 11-12% loan growth for the full year supported by strong sanctions and normalization of prepayments. The stock currently trades at an attractive valuation of 1.1x FY27 estimated book value per share with a price target of Rs 465. Investors can expect decent earnings growth, a dividend yield rising to 6.3% by FY28, and the company’s commitment toward net-zero non-performing assets by FY26 end adds further confidence for long-term value creation.

Muted Loan Growth and Earnings Consistent With Expectations

Rural Electrification Corporation's (RECL) PAT for 2QFY26 rose 10% year-on-year to Rs 44.3 billion, aligning with market estimates. The first half of FY26 PAT grew 19% YoY with an anticipated 13% YoY growth in the second half. Net Interest Income (NII) expanded 10% YoY to Rs 54.5 billion. Other income surged markedly to Rs 4.6 billion driven by higher fee and commission income, compared to Rs 1.2 billion in the previous year. Operating expenses rose 12% YoY but the cost-income ratio held steady at 2.5%. The stable operating performance underlines RECL's resilience despite challenges posed by high prepayments and tight spreads.

Stable Margins Amid Slight NIM Compression

Yields on loans declined slightly by 5 basis points QoQ to 9.95%, while cost of borrowings remained stable at 7.2%, resulting in a 5 basis points QoQ compression in spreads to 2.75%. Reported Net Interest Margin (NIM) for 1HFY26 diminished by 10 basis points QoQ to 3.64%. Management expects NIMs to remain in the range of 3.5% to 3.75%, with spreads maintained between 2.75% to 3%. Borrowing costs increased marginally due to higher hedging costs amid currency volatility, with 99% of foreign borrowings fully hedged offering protection against exchange rate fluctuations.

Asset Quality Remains Robust, On Track for Net-Zero NPA

RECL’s asset quality remains sound with Gross Stage 3 assets stable at 1.05% and Net Stage 3 at 0.25%. Provision Coverage Ratio (PCR) on Stage 3 assets stood firm at 77%. Credit costs translated into an annualized 2 basis points for 1HFY26 with total provisions of Rs 1.3 billion as anticipated. The company is progressing well on stressed assets, with key projects like Hiranmayee Power and Sinnar Thermal in advanced resolution stages expected by FY26 end. The management reiterated its commitment to becoming a net-zero NPA institution by the fiscal year-end, reassuring investors on improving risk metrics.

Loan Book and Disbursement Growth Outlook

RECL’s Asset Under Management (AUM) stood flat quarter-on-quarter but grew 7% year-on-year to Rs 5.82 trillion. Despite 1HFY26 muted loan growth, healthy disbursements of Rs 560 billion in 2QFY26 and a strong sanctions pipeline underpin management’s guidance for 11-12% loan growth in FY26. Prepayments, including Rs 114 billion from the Kaleshwaram Irrigation project, cast a near-term growth headwind but are expected to normalize in the second half. The company targets scaling its loan book to Rs 10 trillion by FY30, with renewables comprising 30% of the portfolio, reflecting its strategic focus on sustainable energy financing.

Valuation and Investment Target

RECL currently trades at a price-to-book value (PBV) multiple of 1.1x on Sep 2027 estimated book value per share, reflecting an attractive entry point considering expected earnings and dividend growth. Motilal Oswal has assigned a target price of Rs 465 for the stock, implying upside potential of approximately 20% from current levels of Rs 386. The expected earnings per share (EPS) are Rs 65.9 for FY26 and Rs 70.6 for FY27, projecting a PAT CAGR of around 11% for FY25-FY28. The dividend yield is forecasted to increase steadily, reaching 6.3% by FY28, adding to the total shareholder returns.

Key Risks and Challenges

Investors should weigh risks related to potential weak loan growth due to elevated prepayments and competitive refinancing pressures that could slow portfolio expansion. Additionally, increasing exposure to high-risk power projects without power purchase agreements (PPAs) and margin compression amid heightened competition in the renewable financing segment could weigh on profitability. Nevertheless, RECL’s strong credit ratings (AAA domestic and Aa3 international) and prudent hedging provide some insulation against volatility.

Highlights from Management Commentary

RECL receives steady monthly repayments averaging Rs 80-90 billion with prepayments occurring only when DISCOMs have surplus liquidity. The borrowing profile remains well-balanced, with 80-85% fixed-rate debt staggered over five years, enabling gradual benefits from lower-cost funding. The company’s committed order book stands robust at Rs 2.5 trillion providing strong visibility. Management maintains a bullish outlook on the Indian power sector amid large investment opportunities worth nearly Rs 46 trillion over the next 4-5 years spanning renewables, thermal, hydro, nuclear, and transmission infrastructure.

Conclusion and Investment Recommendation

Motilal Oswal reaffirms its BUY rating on Rural Electrification Corporation with a target price of Rs 465, citing stable asset quality, improving profitability, and attractive valuations as core investment triggers. The company’s strategic financing role in India’s power sector transformation, commitment to net-zero NPAs, and steady dividend growth prospects make RECL a compelling pick for investors seeking a blend of growth and stability in the financials space.

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