Whalesbook
Q4 Profit Falls Amid Mixed Full-Year Results
Rural Electrification Corp (RECL) reported its fourth-quarter results for fiscal year 2026, showing a 21% year-over-year drop in profit to INR 33.6 billion. This figure fell 23% below analyst expectations.
While the company's full fiscal year (FY26) profit grew 3% to INR 163 billion, its net interest income for the quarter declined 16% year-over-year to INR 51.7 billion.
RECL's stock, trading around INR 395.50 on April 29, 2026, saw investor caution after the announcement, despite its substantial market capitalization of INR 750.5 billion. Brokerage firm Motilal Oswal maintained its BUY recommendation and INR 440 price target, even as it revised its own earnings forecasts downward.
Analysts Lower Forecasts on Margin Squeeze
Motilal Oswal cut its profit estimates for RECL for fiscal years 2027 and 2028 by about 9% and 11%, respectively. The firm pointed to expected lower profit margins and rising credit costs as key reasons for these adjustments.
This outlook for RECL contrasts with peer Power Finance Corporation (PFC), which recently reported a 15% profit increase. RECL's forward price-to-earnings ratio suggests a premium compared to PFC, even though RECL's asset quality outlook faces more pressure.
Historically, RECL shares have seen short-term dips of 3-5% after profit declines, often recovering within two weeks, indicating investor faith in its long-term outlook.
However, the broader Indian power sector and its non-banking financial companies (NBFCs) face challenges from higher funding costs and increased scrutiny on asset quality.
Motilal Oswal still forecasts loan growth for RECL and expects improved profitability by FY28, but acknowledges sector headwinds and specific margin pressures.
Concerns About Future Profitability
Even with Motilal Oswal's BUY rating, analysts highlight risks. The revised earnings forecasts for FY27 and FY28 are based on expectations of shrinking profit margins and higher credit costs, creating obstacles for future profits.
RECL faces a tougher environment with persistently high funding costs that directly squeeze its net interest margins, unlike some competitors.
Motilal Oswal's INR 440 target price relies on FY28 book value per share (BVPS) estimates, which some analysts believe might be too high. If RECL's actual book value is closer to INR 365, the target price would require the company to significantly exceed revised earnings or trade at a much higher valuation.
Other analysts, like Nomura, view RECL more cautiously, holding a Neutral rating and a INR 380 target price, specifically citing concerns over margin pressures. RECL's focus on government projects, while steady, can result in slower loan disbursement compared to private sector lenders.
Outlook and Analyst Targets
Looking ahead, Motilal Oswal anticipates RECL's profit to grow at an average annual rate of 5% between FY26 and FY28, with continued expansion in loans. Their INR 440 price target suggests a potential upside of about 11% from current levels.
Investors will be watching closely to see how RECL manages its credit costs and improves margins in a competitive financial landscape. HDFC Securities recently upgraded its rating to 'Add' with a INR 420 target, emphasizing loan growth potential.