- Profit grew only 0.3% YoY while falling 8.6% sequentially.
- Revenue rose 5% YoY but slipped 1% quarter‑on‑quarter.
- Expenses jumped 8.5%, squeezing margins.
- Gross NPA fell to 0.88% and net NPA to 0.20%, indicating a healthier loan book.
- CRAR stayed robust at 24.26%, far above regulatory minimum.
- Third interim dividend announced at 46% (₹4.60 per share).
- Stock closed marginally lower, down 0.6% at ₹375.20.
You missed the warning signs in REC’s Q3 numbers, and your portfolio may be paying the price.
Why REC’s Flat Profit Growth Raises Red Flags
REC posted a standalone net profit of ₹4,043.08 crore for Q3 FY26, a mere 0.3% increase over the same quarter last year. While the headline looks benign, the sequential decline of 8.6% from ₹4,425.86 crore in Q2 signals a loss of momentum. For a Maharatna lender that traditionally rides the tailwinds of India’s power‑infrastructure push, such a slowdown warrants a deeper look.
Revenue Trends: Is the Power Lending Boom Fading?
Revenue from operations climbed 5% YoY to ₹14,910.88 crore, reflecting continued demand for financing large‑scale power projects. However, the 1% drop from ₹15,084.13 crore in Q2 suggests that the quarter‑to‑quarter growth is losing steam. The broader power‑sector financing market is experiencing a modest deceleration as several mega‑projects face regulatory delays and cost overruns. This slowdown can translate into fewer new loan disbursements for REC, pressuring top‑line growth.
Expense Surge and Margin Pressure Explained
Total expenses rose 8.5% to ₹9,836.10 crore, outpacing revenue growth. The expense increase stems from higher provisioning for stressed assets, staff cost inflation, and elevated technology spend as REC modernizes its underwriting platforms. The expense‑to‑revenue ratio therefore widened, eroding net interest margin (NIM). For investors, a rising expense base without commensurate revenue growth is an early warning of margin compression.
Asset Quality Turnaround: What the NPA Numbers Reveal
On the positive side, REC’s asset quality showed marked improvement. Gross NPA fell sharply to 0.88% from 1.95% in December 2024, and net NPA declined to 0.20% from 0.74% over the same period. Provisioning coverage for Stage‑3 assets improved to 76.96% from 71.73%, indicating that the bank is setting aside sufficient buffers against potential defaults. In simple terms, a lower NPA means the loan book is cleaner, reducing future loss risk.
Capital Adequacy: The Safety Net That Still Holds
REC’s capital to risk‑weighted assets ratio (CRAR) stood at a healthy 24.26%, well above the 15% regulatory minimum for Indian banks. This strong capital position gives REC ample room to absorb shocks, support new lending, and meet dividend expectations. A high CRAR is a key metric for risk‑averse investors looking for stability in a volatile sector.
Competitive Landscape: How Tata Power Finance and Adani Transmission React
Peers such as Tata Power Finance and Adani Transmission are also navigating the same macro‑environment. Tata Power Finance reported a 7% YoY profit rise but highlighted a 3% sequential dip, citing similar expense pressures. Adani Transmission, while not a pure lender, showed a 4% revenue dip due to delayed project completions. The common thread is a softening in new project pipelines, which could lead to a broader earnings compression across power‑sector financiers.
Historical Parallel: Past PSU Earnings Dips and Market Reaction
Looking back to FY22, Power Finance Corporation experienced a 9% sequential profit fall amid rising NPAs. The market punished the stock with a 12% slide, but once the asset quality improved and the balance sheet was recapitalized, the share price rebounded over the next 12 months, delivering a 25% total return. This historical pattern suggests that short‑term profit weakness in a well‑capitalized PSU can be a buying opportunity if fundamentals remain strong.
Investor Playbook: Bull vs Bear Cases for REC
Bull Case: Continued improvement in NPAs and a robust CRAR position REC to capture market share as weaker lenders retreat. The 46% interim dividend signals confidence in cash flow, and the strong capital base allows for strategic loan pricing to win new projects. If power‑sector capital spending picks up in FY27, REC could see double‑digit revenue growth, pushing earnings multiples higher.
Bear Case: Sequential profit decline and rising expense ratio could indicate deeper operational inefficiencies. If project delays persist, loan disbursements may stall, leading to flatter revenue and further margin pressure. Additionally, any policy shift reducing subsidies for power infrastructure could curtail demand, weighing on REC’s growth outlook.
Investors should weigh these scenarios against their risk tolerance. A balanced approach might involve a modest allocation to REC, monitoring quarterly expense trends and the pipeline of power projects for signs of acceleration.