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Modest disbursement growth
In H1FY11, REC’s growth momentum slowed down relative to its past five years’
historical average and also compared to its peer Power Finance Corporation
(PFC). Our interactions with market participants indicate that a few banks (viz.,
SBI, PNB, Syndicate etc.,) are getting more competitive on pricing in the power
financing space. While we were building in pick up in disbursements in H2FY11,
REC management indicated that the modest pace continues in Q3FY11 (till date)
as well. Ergo, we are revising down our disbursement growth estimate in the
near term to 18% for FY11-12 (27% earlier) and our loan growth estimate to
23% CAGR over FY10-12 (27% earlier). However, power project disbursements
are chunky in nature and pose a risk to our downward revision in disbursements.
Margins to witness limited compression
Despite a sharp spike in wholesale cost (by 250bps in past six months),
management sounded confident on maintaining NIMs at around 4.3% and
indicated that compression in margins will be marginal. We believe IFC status is
mitigating the wholesale funded risk (widening the window in the international
market). REC plans to raise another USD 500 mn of ECBs in January, over and
above USD 400 mn raised in September. Even the ALM profile is favorable
wherein it will benefit from upward re-pricing (by 50bps) of loans amounting to
INR 100 bn (15% of current book), while on the liability side, only INR 30 bn is
due for re-pricing. We are building in margins of 4.3% for FY11-12E.
Outlook and valuations: growth modest, NIMs stable; maintain ‘BUY’
In light of the modest pace of disbursements in FY11 and increasing competition,
we are revising down our loan growth estimates. We are, however, maintaining
our NIM assumption of 4.3% over FY10-12 and expect REC to deliver EPS
growth of 20% and RoEs of 20% over FY11-12E. The company is trading at 2.1x
FY12E book and 10.7x earnings. We maintain ‘BUY/Sector Outperformer’
recommendation/rating on the stock. However, at this stage, we prefer PFC over
REC considering: (1) growth trends are diverging in favor of PFC; (2) margin
differential between REC and PFC will narrow down with implementation of DTC
and both having similar access to borrowings under IFC status; and
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