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2Q FY11 results: profit growth in line though interest spread moderates
What has changed?
• The net profit rose by 25% YoY to Rs6.18bn, in line with our forecast and those in
the market. However, loan and disbursement growth was below expectations. The
interest spread came under slight pressure, down 11 basis points QoQ at 3.24%.
Impact
• Rural Electrification’s (REC) interest spread was under pressure as the increase in
the yield on its loans was not commensurate with the increased cost of borrowings.
The interest spread was 3.24%, down 11 basis points both YoY and QoQ.
Management has guided for an interest spread of more than 3% for FY11, which
we believe should be fairly achievable.
• Fresh disbursements to the power generation sector dropped quarter-on-quarter,
whereas those to the transmission and distribution sectors and short-term loans
increased sequentially. While total loan sanctions declined by 36% YoY and
55% QoQ, loan disbursals were flat on a year-on-year basis and up 19% QoQ.
• There were no signs of stress on asset quality, as both gross and net nonperforming
loans (NPL), at 0.03% and 0.003%, respectively, were stable both
on quarter-on-quarter and year-on-year bases.
Valuation
• While the drop in sanctions was higher than expected, we believe that given the
lumpy nature of the business, it is not appropriate to judge the growth in
sanctions and disbursals on a quarterly basis. We believe REC is well-poised to
increase its loan book at a CAGR of 29% for FY10-12 and deliver a high ROA
of 3%. We have raised our six-month target price to Rs390 from Rs332, as we
now value the stock at a target PBR of 2.5x on our FY12 BVPS forecast, given
our ROE forecast of 20% for the company for the next two years.
Catalysts and action
• We maintain 1 (Buy) rating. We believe improving loan growth and maintaining
interest spreads at current levels could lead to a further re-rating of the stock.
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