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Rural Electrification Corporation Ltd
Slower growth priced-in; Riskreturn attractive, Buy
Cut earnings and PO, but risk-return attractive, Buy
We cut our PO to Rs350 to factor in 1) earnings cut by 4/6% for FY12/13 and 2)
macro headwinds (assuming higher CoE). REC has U/p the market by +18% over
3 months and is pricing in the near-term slow-down in growth. Valuations at 1.6x
FY12 book look attractive given the strong return ratios (RoAs of +3.3% and RoEs
of +22%) and healthy asset quality (gross NPLs at 3bps). Hence, we believe that
stock can trade up to +2.3-2.4x FY12 book (50% premium to Gordon theory
multiples), as structurally power financing remains a growth story over the longerterm
and we think REC remains better positioned to capitalize on the growth.
3QFY11: Earnings 3% ahead of est.; but growth slows
REC reported earnings of Rs6.6bn (up 40% yoy; 3% ahead) driven by lower opex
and higher other income on exchange gains. More importantly, topline (in-line)
was up 36% yoy as margins increased +40bps yoy to 4.6% on rising loan yields.
But the pace of growth has slowed down, with sanctions and disbursements flat
yoy in 3Q. Resultantly, loan growth has slowed to ~21% yoy vs. +25% earlier.
Earnings growth of ~20% to sustain, as vol. growth picks-up
We estimate earnings growth of 13/19/21% in FY11/12/13 (net profit growth of
29/19/21% in FY11/12/13). More importantly, while growth (disbursements) to be
<10% in FY11, we expect a rebound in FY12/13 to +23/24% driven by unutilized
sanctions of Rs1.3tn (+US25bn) and overall increased execution as FY12 is the
final year of the 11th Five Year Plan. Also, REC with prudent ALM profile (80%
loans floating and 80% liabilities fixed rate) and ability to raise ECB / retail infra.
bonds (tax free), REC should be able to protect their margins in rising rate regime.
Price objective basis & risk
Rural Electrification Corporation Ltd (XULEF)
We rate REC a Buy (PO of Rs350). REC has underperformed the market by
+18% over 3 months and is pricing in the near-term slow-down in growth. Riskreturn
remains attractive in our view, given the strong return ratios (RoAs of
+3.3% and RoEs of +22%) and healthy asset quality (gross NPLs at 3bps).
Hence, we believe that stock trading at 1.6x FY12E book can trade up to +2.3-
2.4x FY12E book (50% premium to Gordon theory multiples), as structurally
power financing remains a growth story over longer-term and we believe REC
remains better positioned to capitalize on the growth. REC remains a direct play
on the India infra story, in our opinion. Risks are higher exposure to State
Electricity Boards (SEBs) in the T&D space that may not be able to increase
tariffs resulting in defaults to REC.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification Corporation Ltd
Slower growth priced-in; Riskreturn attractive, Buy
Cut earnings and PO, but risk-return attractive, Buy
We cut our PO to Rs350 to factor in 1) earnings cut by 4/6% for FY12/13 and 2)
macro headwinds (assuming higher CoE). REC has U/p the market by +18% over
3 months and is pricing in the near-term slow-down in growth. Valuations at 1.6x
FY12 book look attractive given the strong return ratios (RoAs of +3.3% and RoEs
of +22%) and healthy asset quality (gross NPLs at 3bps). Hence, we believe that
stock can trade up to +2.3-2.4x FY12 book (50% premium to Gordon theory
multiples), as structurally power financing remains a growth story over the longerterm
and we think REC remains better positioned to capitalize on the growth.
3QFY11: Earnings 3% ahead of est.; but growth slows
REC reported earnings of Rs6.6bn (up 40% yoy; 3% ahead) driven by lower opex
and higher other income on exchange gains. More importantly, topline (in-line)
was up 36% yoy as margins increased +40bps yoy to 4.6% on rising loan yields.
But the pace of growth has slowed down, with sanctions and disbursements flat
yoy in 3Q. Resultantly, loan growth has slowed to ~21% yoy vs. +25% earlier.
Earnings growth of ~20% to sustain, as vol. growth picks-up
We estimate earnings growth of 13/19/21% in FY11/12/13 (net profit growth of
29/19/21% in FY11/12/13). More importantly, while growth (disbursements) to be
<10% in FY11, we expect a rebound in FY12/13 to +23/24% driven by unutilized
sanctions of Rs1.3tn (+US25bn) and overall increased execution as FY12 is the
final year of the 11th Five Year Plan. Also, REC with prudent ALM profile (80%
loans floating and 80% liabilities fixed rate) and ability to raise ECB / retail infra.
bonds (tax free), REC should be able to protect their margins in rising rate regime.
Price objective basis & risk
Rural Electrification Corporation Ltd (XULEF)
We rate REC a Buy (PO of Rs350). REC has underperformed the market by
+18% over 3 months and is pricing in the near-term slow-down in growth. Riskreturn
remains attractive in our view, given the strong return ratios (RoAs of
+3.3% and RoEs of +22%) and healthy asset quality (gross NPLs at 3bps).
Hence, we believe that stock trading at 1.6x FY12E book can trade up to +2.3-
2.4x FY12E book (50% premium to Gordon theory multiples), as structurally
power financing remains a growth story over longer-term and we believe REC
remains better positioned to capitalize on the growth. REC remains a direct play
on the India infra story, in our opinion. Risks are higher exposure to State
Electricity Boards (SEBs) in the T&D space that may not be able to increase
tariffs resulting in defaults to REC.
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