Whalesbook
Strong Profits Support Attractive Dividend
REC Limited, a large state-run firm financing India's infrastructure growth, reported a consolidated net profit of ₹16,282 crore for the fiscal year ending March 2026. This strong financial performance supports a dividend of ₹18.6 per share for FY26, offering an attractive 5.4% dividend yield at the current share price. The company's profits have grown steadily, and a government rule requiring at least 30% of net profits to be paid out has helped maintain a trend of increasing dividends. Total cash returned to shareholders rose to ₹4,934 crore in FY26, nearly double the FY21 amount. This commitment to shareholder returns is backed by its earnings and managed to balance dividend payouts with retaining funds for loan book expansion.
Loan Growth and New Sectors
REC's capital spending reached a record ₹2.1 lakh crore in FY26, up 10.4% from the previous year. Loan disbursements, excluding the Revamped Distribution Sector Scheme, increased by 28%, mainly due to higher funding for the distribution sector. The company's loan book grew to about ₹5.8 lakh crore. While REC traditionally finances the power sector, it is expanding into non-power infrastructure like metro rail, airports, roads, and healthcare, and increasing its clean energy portfolio, aiming for 30% of its loan book by 2030. This strategy aligns with national goals but adds complexity and new risks. Despite a small drop in its Net Interest Margin (NIM) to 3.4% because of higher funding costs, overall income grew by 5.7%. Asset quality remains strong, with net bad loans (NPAs) falling to an eight-year low of 0.12% in FY26.
Valuation Compared to Peers
REC Limited's stock trades at a price relative to its book value of 1.1 times. This valuation is lower than the industry average of 2.1 times and also trails other public sector lenders like IRFC (around 2.3 times) and HUDCO (around 1.9 times). IREDA, focused on renewable energy, is valued much higher at about 2.8 times, as the market expects more from the green energy sector. REC's return on equity (ROE) was a solid 20.1% in FY26, and its return on assets (ROA) was 2.7%. This shows efficient use of capital, competitive even against entities like ICICI Bank (ROA of 2.1%). REC's share price has risen significantly over the past year, from ₹200-220 to around ₹345.50, which has lowered its dividend yield based on the current market price.
Merger and Diversification Risks Loom
REC's strong financial performance and dividend yield are appealing, but investors should consider key strategic shifts. The planned merger with Power Finance Corporation (PFC), expected by April 1, 2027, presents a major integration challenge. The combined company will be a large financial institution, but how it will achieve savings and what its dividend policy will be are key questions. Furthermore, REC's expansion into non-power sectors and new areas like green hydrogen and electric mobility, while aligned with national ambitions, brings a wider range of risks. These sectors may have different credit risk profiles and require new skills in assessing loans compared to REC's traditional power sector lending. As a non-banking financial company (NBFC), REC operates with significant leverage. Any missteps in managing loan quality across these expanding areas, or broader economic problems affecting infrastructure financing, could pressure its finances. The company's ability to maintain its current dividend payout level will depend on how effectively it manages these evolving risks alongside the complexities of the upcoming merger.
Solid Financial Safeguards
REC maintains strong financial safeguards, essential for its extensive lending operations. In FY26, its liquidity measure (LCR) stood at 150%, well above the 100% regulatory requirement, showing ample easily sellable assets. Its capital reserves ratio (CRAR) was 23.1% in FY26, also far above the 15% minimum. These strong liquidity and capital reserves offer a good buffer against short-term market shocks, supporting continued growth and dividend payouts without straining its finances.
Outlook: Growth vs. Execution Risks
The Indian government's ongoing focus on infrastructure development and energy transition goals provides a supportive environment for REC's core business. Analysts are mostly positive about the company's fundamental strength and its role in national development. However, views differ on the short term. Some highlight the attractive dividend yield and valuation discount, while others are cautious about the challenges in carrying out diversification and the PFC merger. Most forecasts expect profits to keep growing, driven by steady demand for infrastructure financing. However, the ability to maintain the current dividend yield will be a key focus for investors tracking the merger progress and performance in new lending areas.