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On Friday, Emkay Global initiated coverage on REC Ltd (RECL:IN), a leading financial institution in India's power sector, with a Buy rating and a price target of INR650. The firm's analysis points to a favorable macroeconomic environment and significant capital expenditure in the power sector as key drivers for REC's growth.
The strategic shift of REC towards increasing its renewable energy portfolio to 30% and diversifying into infrastructure and logistics is expected to result in an Asset Under Management (AUM) Compound Annual Growth Rate (CAGR) of approximately 18.2% from fiscal year 2024 to 2027. Emkay Global highlights that while this diversification may put some pressure on yields, REC's robust AAA credit rating and access to low-cost, long-term funding, including foreign capital, are likely to stabilize net interest margins.
The analyst from Emkay Global also notes that REC's profitability should benefit from improved recoveries of legacy assets and lower credit costs, which are supported by a high proportion of government-backed loans. Additionally, the potential for provision write-backs in the near term could further bolster REC's financial performance.
By the end of the 2027 fiscal year, REC's AUM is projected to reach approximately Rs8.4 trillion. The institution is also expected to maintain strong Return on Assets (RoA) and Return on Equity (RoE) metrics, estimated at around 2.5% and 20.5% respectively, over the period from 2025 to 2027. These projections are underpinned by the anticipated capital expenditure in the power sector, along with REC's strategic initiatives and the supportive role of the Indian government in power sector reforms.
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