Rural Electrification -PAT grows 25% yoy at Rs6.1 bn; REDUCE.:: Kotak Sec

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Rural Electrification Corp. (RECL)
Banks/Financial Institutions
PAT grows 25% yoy at Rs6.1 bn; retain REDUCE. REC reported PAT of Rs6.1 bn, up
25% yoy and 4% above estimates. Business traction was somewhat lower with flat
disbursements and loan growth at 25% as compared to 27-29% in the past. A rise in
borrowing cost pulled down margins. Asset quality performance was stable despite
fears of slippages. We tweak estimates and retain our REDUCE rating with a price
target of Rs350 (Rs325 earlier).


Growth moderated qoq
REC’s reported NII was up 29% yoy on the back of 25% loan growth and higher other income.
Loan approvals declined by 37% while overall disbursements were flat. Incremental lending to the
T&D sector declined sharply, offset by higher lending to generation sector. Infrastructure finance
business tends to be lumpy and challenging to track on a qoq basis; nevertheless, this may be early
sign of moderation in growth.
Spreads compress marginally
REC reported margins of 4.4% during the quarter somewhat below 4.6% in 1QFY11, higher than
4.25% reported in 2QFY10. Spreads, as per KIE estimates, declined to 3.1% from 3.3% and 3.2%
in 1QFY11 and 2QFY10, respectively. During the quarter, REC raised forex debt of US$400 mn, of
which US$200 mn was hedged. REC recognized MTM gain of Rs272 mn – reflected in other
income. One-time fees for raising forex debt (Rs346 mn) increased the reported borrowings cost
(this is adjusted in our spread calculation). We believe the rise in bulk borrowings rates over the
past few weeks will likely be reflected in REC’s financials over the next 1-2 quarters. Lending rates
have been stable for the past few quarters, the company will likely raise its PLR to support spreads.
We are modeling a marginal (15-20 bps) decline in NIM for the next six quarters.
Asset quality performance stable
REC’s gross NPLs remained stable at 0.03%. Consequently, NPL cost was NIL as compared to
Rs200 mn considered in our estimates due to default risk of Konaseema power project, Andhra
Pradesh. According to sources, the power project has managed a likely liquidity crunch and hence
the asset was classified as ‘performing’.
Raising estimates; retain REDUCE
We are revising up our estimates by 5% and 2% for FY2011E and FY2012E on the back of better
NIM, somewhat offset by marginally lower loan growth (25-26% from 27-28% factored in the
past) and higher operating expenses. The private sector will play a more important role in XII fiveyear
plan and hence will have a more crucial role in REC’s loan growth. However, margins will
likely moderate in this segment due to higher competition.