REC: Asset growth stable; NIMs come off :: Edelweiss

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Rural Electrification Corporation (REC) reported PAT growth of 25% to INR 6.18 bn in
Q2FY11, in line with our estimate. Key highlights for the quarter were: (1) 25%
growth in loan book; (2) NIMs coming off 20bps Q-o-Q to 4.4%; and (3) asset
quality maintained at near zero level. The company has raised USD 400 mn ECB (5-
years term) in September, on which it incurred an upfront fee of INR 347 mn (under
‘interest expense’). Moreover, it has booked forex gain of INR 273 mn (under ‘other
income’) on unhedged portion (USD 200 mn) of this ECB. Adjusting for this, PAT
would have been INR 6.26 bn (27% Y-o-Y growth).
􀂃 Disbursements flat Q-o-Q; loan book likely to grow by 27% CAGR
REC disbursed loans worth INR 55.5 bn (flat Y-o-Y), ending H1FY11 with 12%
growth; generation projects accounted for 50% of disbursements. Sanctions
were relatively lower at INR 104 bn, ending H1FY11 with growth of 6%. The
company has unutilised sanctions of INR 1 tn and drawdown from these
sanctions is expected over the next two-three years. We are maintaining our
loan growth estimate of 27% CAGR over FY10-12.
􀂃 Margins came off 20bps Q-o-Q; to sustain at 4.3% over FY11-12E
NIMs in Q2FY11 came off 20bps to 4.4% due to similar rise in funding cost. The
company has increasingly relied on CPs and upward movement in wholesale
rates impacted its funding cost. REC has also raised USD 400 mn of ECBs in
September at 175bps above LIBOR (blended cost of 7.15% post hedging). It
plans to raise another USD 500 mn of ECBs in January and INR 10 bn of
infrastructure bonds to meet the overall borrowing requirement of ~INR 260 bn
for this fiscal. Management indicated that it will benefit from upward re-pricing
(by 50bps) of loans amounting to INR 100 bn (15% of current book); on the
liability side, only INR 30 bn is due for re-pricing. This will provide some support
to margins; we are building in margins of 4.3% for FY11-12E.
􀂃 Outlook and valuations: Positive; maintain ‘BUY’
Considering unutilised sanctions of above INR 1 tn and REC’s leadership, we are
building in loan growth CAGR of 27% over FY10-12E. The company has received
infrastructure finance company (IFC) status in September 2010 and this will help
mitigate the whole sale funded risk by broad-basing the borrowing profile. On
the back of visible growth outlook and relatively stable margins, we expect 23%
earning CAGR and average RoE of 21% over FY11-12E. The stock is currently
trading at 2.5x FY12E book and 12.3x FY12E earnings. We maintain
‘BUY/Sector Outperformer’ recommendation/rating on the stock.