Rural Electrification Corporation - 2QFY11 - Steady business growth; Buy :: Anand Rathi

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Rural Electrification Corporation - 2QFY11 - Steady business growth; Buy

n       Steady business growth continues. REC reported 25% yoy rise in net profit, led by strong loan growth and largely stable margins. We retain a Buy as we expect the strong business growth, superior margins and negligible credit cost to sustain high RoA and RoE, of over 3.3% and 23% respectively.

n       Loans up 26%. The loan book grew 26% yoy, and 5.4% qoq, to Rs729bn. Disbursements were flat yoy. Quarterly sanctions were down 36% yoy, to Rs104bn. (In 1QFY11, REC had sanctioned projects worth Rs229bn.) A sanction pipeline of over Rs1trn would drive the 28% CAGR in loans over FY10-13e.

n       Spreads and NIM dropped marginally. Cost of funds (adjusted for one-time arrangement fees on ECB) rose 20bp qoq, to 8%, owing to increased wholesale funding costs. Lending yields were up slightly (9bp qoq) to 11.2%. The spread declined 11bp to 3.1%. NIM stood at 4.4% vs. 4.6% in 1QFY11. We have assumed a 10% drop in spreads/margins in FY11e (from FY10).

n       Return ratio to be strong. We expect REC to record an earnings CAGR of 26% over FY10-13e on the back of strong loan growth and stable margins. This would lead to high RoA and RoE, of more than 3.3% and 23% respectively, over FY10-13e.

n       Valuation. At our target price, REC would trade at 3.3x FY11e and 2.8x FY12e PBV respectively. Risks: Slowdown in power sector investment, regulatory changes and poor health of SEBs.