With a market capitalisation of ₹1,00,852 crores, REC's latest results reveal a concerning trend: whilst the company continues to grow its top line with interest income rising 10.75% year-on-year to ₹15,152.67 crores, profitability margins are under pressure. The net interest margin contracted to 29.14% in Q3 from 30.30% in Q2, marking the second consecutive quarter of margin erosion. The stock has underperformed the broader market significantly, declining 13.75% over the past year whilst the Sensex gained 7.88%.
The September quarter results paint a picture of a company navigating challenging terrain. Whilst REC continues to expand its loan book and maintain healthy asset quality, the sequential decline in profitability raises questions about the sustainability of its growth trajectory. The company's operating profit margin excluding other income remained robust at 96.86%, though marginally lower than the previous quarter's 98.53%.
Financial Performance: Growth Momentum Decelerates
REC's Q3 FY26 financial performance reveals a mixed bag of achievements and concerns. Interest income, the company's primary revenue stream, reached ₹15,152.67 crores, registering a sequential growth of 2.82% and a healthy year-on-year expansion of 10.75%. This growth reflects the company's continued success in expanding its loan portfolio across the power sector value chain.
However, the more concerning aspect lies in the profitability trajectory. Net profit of ₹4,414.93 crores, whilst showing a 9.34% year-on-year increase, declined 1.14% sequentially from Q2's ₹4,465.71 crores. This marks a deceleration in the growth momentum that had characterised the company's performance in earlier quarters. The profit before tax also witnessed a sequential decline of 2.07%, falling from ₹5,666.41 crores in Q2 to ₹5,548.94 crores in Q3.
| Quarter | Interest Income (₹ Cr) | QoQ % | Net Profit (₹ Cr) | QoQ % | NIM % |
|---|---|---|---|---|---|
| Sep'25 | 15,152.67 | +2.82% | 4,414.93 | -1.14% | 29.14% |
| Jun'25 | 14,737.45 | -4.00% | 4,465.71 | +3.61% | 30.30% |
| Mar'25 | 15,351.88 | +7.57% | 4,309.98 | +5.73% | 28.07% |
| Dec'24 | 14,271.92 | +4.31% | 4,076.35 | +0.96% | 28.56% |
| Sep'24 | 13,682.43 | +4.62% | 4,037.72 | +16.69% | 29.51% |
| Jun'24 | 13,078.66 | +3.17% | 3,460.19 | -15.17% | 26.46% |
The margin compression is particularly noteworthy. The net interest margin contracted to 29.14% in Q3 from 30.30% in Q2, a decline of 116 basis points. This erosion in margins suggests that the company is facing pressure on its lending spreads, possibly due to competitive intensity in the power financing sector or rising cost of funds. The gross profit margin also declined sequentially from 38.49% to 36.66%.
Interest expenses rose to ₹9,130.68 crores in Q3, up 2.20% sequentially, outpacing the growth in interest income. This divergence between revenue and cost growth is a key factor behind the margin compression. The company's tax rate remained relatively stable at 20.44%, down marginally from 21.19% in the previous quarter.
Margin Pressure Alert
Sequential margin compression for two consecutive quarters raises concerns. Net interest margin declined from 30.30% in Q2 to 29.14% in Q3, whilst gross profit margin fell from 38.49% to 36.66%. This trend warrants close monitoring as it directly impacts profitability despite top-line growth.
Capital Efficiency: Strong ROE Anchors Investment Case
Despite the near-term profitability concerns, REC's capital efficiency metrics remain a significant strength. The company's return on equity (ROE) stands at an impressive 20.68%, well above the sector average and indicative of superior capital allocation. The five-year average ROE of 19.88% demonstrates consistent value creation for shareholders over the long term.
This high ROE is particularly commendable given the capital-intensive nature of the power financing business. It reflects REC's ability to generate healthy returns whilst maintaining a large balance sheet. With shareholder funds of ₹78,376.06 crores as of March 2025, the company has demonstrated disciplined growth in equity capital whilst delivering robust returns.
The company's balance sheet reveals a debt-to-equity ratio of 6.18 times, which, whilst appearing elevated, is typical for non-banking financial companies in the infrastructure financing space. This leverage enables REC to deploy significant capital across the power sector whilst maintaining adequate capitalisation. The book value per share stands at ₹295.52, providing a solid foundation for the current market price of ₹375.20.
Quality Indicator: Institutional Confidence
Institutional holdings stand at 32.74%, reflecting sustained confidence from sophisticated investors. The company's "Good" quality grade, driven by its 19.88% average ROE and consistent 12.65% sales CAGR over five years, underscores its fundamental strength despite recent quarterly softness.
Dividend Appeal: Attractive Yield in Uncertain Times
For income-focused investors, REC offers significant appeal through its dividend policy. The company currently provides a dividend yield of 5.25%, substantially higher than the market average and most peers in the finance sector. The latest dividend of ₹4.60 per share, with an ex-dividend date of October 27, 2025, reflects the company's commitment to returning cash to shareholders.
The dividend payout ratio reached 30.16% for the full year ending March 2025, striking a balance between rewarding shareholders and retaining capital for growth. With annual dividends per share reaching ₹18.00, the highest in the company's recent history, REC has demonstrated a progressive dividend policy that complements its growth strategy.
Peer Comparison: Valuation Discount Justified?
When benchmarked against peers in the power and infrastructure financing space, REC presents an interesting valuation proposition. The company trades at a price-to-earnings ratio of just 5.72 times, significantly below the industry average of 22 times. This substantial discount warrants careful examination.
| Company | P/E (TTM) | P/BV | ROE % | Div Yield | Debt/Equity |
|---|---|---|---|---|---|
| REC Ltd | 5.72 | 1.18 | 19.88% | 5.25% | 6.18 |
| Power Finance Corporation | 5.15 | 1.00 | 19.17% | 3.70% | 7.88 |
| I R F C | 22.39 | 2.77 | 13.74% | 1.50% | 2.73 |
| HUDCO | 14.53 | 2.26 | 13.11% | 3.00% | 7.03 |
| Indian Renewable Energy | 19.88 | 2.90 | 14.40% | — | 5.41 |
| CreditAccess Grameen | 41.90 | 2.84 | 11.49% | — | 2.81 |
REC's superior ROE of 19.88% compared to the peer average of approximately 14% justifies a premium valuation, yet the stock trades at a significant discount on P/E and P/BV metrics. The price-to-book value of 1.18 times is the lowest among major peers, with most trading above 2 times book value. This valuation gap suggests either that the market is pricing in significant risks or that REC represents a value opportunity.
The company's dividend yield of 5.25% is the highest in the peer group, offering tangible returns whilst investors await capital appreciation. However, the recent financial trend being classified as "Flat" and the stock's bearish technical trend have likely contributed to the valuation discount.
Shareholding Dynamics: FII Exodus Continues
The shareholding pattern reveals a concerning trend that partially explains the stock's underperformance. Foreign institutional investors (FIIs) have been steadily reducing their stake, declining from 21.73% in December 2024 to 16.46% in December 2025. This represents a cumulative reduction of 5.27 percentage points over four quarters, signalling waning confidence from international investors.
| Quarter | Promoter % | FII % | MF % | Insurance % | Other DII % |
|---|---|---|---|---|---|
| Dec'25 | 52.63% | 16.46% | 9.18% | 5.26% | 1.83% |
| Sep'25 | 52.63% | 17.97% | 9.41% | 4.82% | 1.69% |
| Jun'25 | 52.63% | 19.16% | 9.66% | 4.29% | 1.61% |
| Mar'25 | 52.63% | 20.48% | 8.85% | 4.48% | 1.52% |
| Dec'24 | 52.63% | 21.73% | 8.45% | 4.13% | 1.38% |
In contrast, domestic institutional investors have shown more stability. Mutual fund holdings declined marginally from 9.41% to 9.18% in the latest quarter, whilst insurance companies increased their stake from 4.82% to 5.26%. Other domestic institutional investors also raised their holdings from 1.69% to 1.83%. The promoter stake, held entirely by Power Finance Corporation Ltd., remains steady at 52.63%.
The shift from FII to retail and domestic institutional ownership is evident in the rising non-institutional holdings, which increased from 11.67% in December 2024 to 14.63% in December 2025. This redistribution of ownership suggests that whilst foreign investors are exiting, domestic investors see value at current levels.
Stock Performance: Significant Underperformance Persists
REC's stock performance over the past year has been disappointing, declining 13.75% whilst the Sensex advanced 7.88%, resulting in a negative alpha of 21.63 percentage points. The stock has underperformed the finance sector significantly, with the sector delivering 21.05% returns over the same period—a gap of 34.80 percentage points.
| Period | REC Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +2.40% | +0.31% | +2.09% |
| 1 Month | +5.50% | -2.51% | +8.01% |
| 3 Months | -2.80% | -2.86% | +0.06% |
| 6 Months | -6.29% | +1.51% | -7.80% |
| YTD | +5.14% | -3.11% | +8.25% |
| 1 Year | -13.75% | +7.88% | -21.63% |
| 2 Years | -24.92% | +14.77% | -39.69% |
| 3 Years | +225.55% | +39.16% | +186.39% |
However, the longer-term picture remains robust. Over three years, REC has delivered exceptional returns of 225.55%, massively outperforming the Sensex's 39.16% gain with a positive alpha of 186.39 percentage points. The five-year and ten-year returns of 277.42% and 419.49% respectively demonstrate the stock's wealth-creation potential over extended periods.
The recent underperformance appears to be a function of multiple compression rather than fundamental deterioration. The stock's high beta of 1.83 indicates greater volatility than the broader market, making it susceptible to sharp swings during periods of market uncertainty. Currently trading at ₹375.20, the stock is 18.43% below its 52-week high of ₹460.00 and 13.32% above its 52-week low of ₹331.10.
"REC's valuation discount reflects near-term concerns, but its superior ROE and attractive dividend yield present a compelling case for patient, income-focused investors willing to look beyond quarterly volatility."
Technical Outlook: Bearish Trend Persists
From a technical perspective, REC remains in a "Mildly Bearish" trend that commenced on January 1, 2026, at ₹367.60. The stock is currently trading below all major moving averages—5-day (₹365.28), 20-day (₹368.78), 50-day (₹358.09), 100-day (₹365.80), and 200-day (₹382.74)—indicating weak momentum across multiple timeframes.
Technical indicators present mixed signals. On a weekly basis, MACD shows mildly bullish tendencies whilst RSI provides no clear signal. Bollinger Bands indicate bullish momentum on the weekly chart but turn mildly bearish on the monthly timeframe. The KST indicator suggests mildly bullish momentum weekly but bearish monthly. This divergence across timeframes reflects the stock's transitional phase.
Key support rests at the 52-week low of ₹331.10, approximately 11.75% below current levels. Immediate resistance is clustered around the 20-day moving average at ₹368.78, followed by stronger resistance at the 200-day moving average of ₹382.74. A sustained move above ₹382.74 would be required to shift the technical outlook to neutral or positive.
Investment Thesis: Value Trap or Opportunity?
REC's investment case rests on several pillars. The company's strong fundamentals—evidenced by a 20.68% ROE, consistent long-term growth (12.65% sales CAGR), and robust dividend yield of 5.25%—provide a solid foundation. The valuation at 5.72 times earnings and 1.18 times book value appears attractive relative to both historical levels and peer multiples.
However, several headwinds temper this optimism. The sequential decline in profitability, margin compression over two consecutive quarters, and "Flat" financial trend classification raise concerns about near-term earnings trajectory. The ongoing FII exodus and bearish technical trend indicate that market participants remain sceptical about the company's immediate prospects.
✅ Key Strengths
- Superior Capital Efficiency: ROE of 20.68%, well above peer average of ~14%
- Attractive Dividend Yield: 5.25% yield provides steady income stream
- Valuation Discount: Trading at 5.72x P/E vs industry average of 22x
- Consistent Long-term Growth: 12.65% sales CAGR over five years
- Strong Promoter Backing: 52.63% stake held by Power Finance Corporation
- Robust Balance Sheet: Shareholder funds of ₹78,376 crores
- Quality Grade: "Good" rating based on fundamental strength
⚠️ Key Concerns
- Margin Compression: NIM declined from 30.30% to 29.14% sequentially
- Sequential Profit Decline: PAT down 1.14% QoQ despite revenue growth
- Flat Financial Trend: Recent quarterly performance showing deceleration
- FII Exodus: Foreign holding declined from 21.73% to 16.46% over four quarters
- Bearish Technical Trend: Trading below all major moving averages
- Significant Underperformance: -13.75% returns vs +7.88% Sensex in 1 year
- High Leverage: Debt-to-equity of 6.18x typical for sector but elevated
Outlook: What Lies Ahead
The path forward for REC hinges on several critical factors. The company must demonstrate its ability to stabilise and expand margins whilst maintaining loan book growth. Any improvement in the net interest margin from the current 29.14% would be viewed positively by the market. Additionally, stemming the FII outflow and attracting fresh institutional capital will be crucial for re-rating the stock.
Positive Catalysts
- Stabilisation or expansion of net interest margins
- Resumption of sequential profit growth trajectory
- Increased institutional buying, particularly from FIIs
- Improvement in financial trend from "Flat" to "Positive"
- Technical breakout above ₹382.74 (200 DMA)
Red Flags to Monitor
- Further margin compression below 29%
- Continued sequential profit decline
- Accelerated FII selling below 15% holding
- Deterioration in asset quality metrics
- Technical breakdown below ₹331.10 support
The power sector outlook remains constructive given India's infrastructure push and electrification goals, providing a favourable operating environment for REC. However, competitive intensity in power financing and potential regulatory changes pose ongoing challenges. The company's ability to navigate these dynamics whilst maintaining its capital efficiency will determine whether the current valuation discount represents a genuine opportunity or a value trap.
The Verdict: Hold with Caution
Score: 44/100
For Fresh Investors: Avoid initiating positions at current levels. Whilst the valuation appears attractive and dividend yield is compelling, the deteriorating financial trend, margin compression, and bearish technical setup suggest waiting for clearer signs of stabilisation. Consider accumulating only if the stock breaks decisively above ₹382.74 with improving quarterly metrics.
For Existing Holders: Consider partial profit booking, especially for those sitting on substantial long-term gains. The 5.25% dividend yield provides some downside cushion, but the risk-reward ratio has turned unfavourable in the near term. Maintain a core holding if invested for dividend income, but reduce exposure to book partial profits and manage portfolio risk.
Fair Value Estimate: ₹410-420 (9-12% upside from current levels), achievable only upon demonstrated margin stabilisation and return to sequential profit growth.
Note— ROCE = (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. The views expressed are those of the author and do not necessarily reflect the official policy or position of any financial institution.
