Deutsche Bank: Buy Rural Electrification Corp- It's the age and mileage

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Deutsche Bank: Buy Rural Electrification Corp- It's the age and mileage


High returns from systemically crucial sector; Buy, c. 34% upside potential
We believe REC effectively captures the quintessential Indian infrastructure
story: lending to the funds-constrained power sector with chronic shortages,
inching its generation and non-rural exposure up while maintaining its
rural focus, and doing all of that with minimal credit losses due to the nature
of the underlying business. Our earnings estimates are above consensus.

Strong demand environment, and well-capitalised to benefit from it
REC is likely to continue its loan expansion as the last two years of the
current Five-Year Plan see substantive power sector investments, combined
with increased exposure to the private sector where REC's presence
had hitherto been modest. The structural advantage on the cost of funds
due to funding mix could be bolstered by greater access to low-cost foreign
currency borrowings. REC's already high capital adequacy ratio, even without
any Tier 2 bonds, could provide an often sought-after high level of
growth with leverage expansion opportunity.

Valuation; state banks' competition & hedging policy key risks
We value REC on an average of three methodologies: single-stage and twostage
Gordon Growth models, and P/E-to-growth. Our target price of
INR400 gives ~34%upside. Overcrowding of the rural market driven by
state banks' financial inclusion initiatives, a new hedging policy keeping
large forex positions open, and management changes are the key risks.