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Rural Electrification
Premier power lender
Event
Rural Electrification Corp. is the second-largest power lender in India. It is a
nonbanking financial company with the government holding the majority
stake. REC was set up by the government in 1969 to fund rural electrification,
ie, transmission and distribution projects in rural areas. However, in 2003 the
company was permitted to lend to all types of power projects irrespective of
size or scope. The company is primarily involved in lending, although it also
has a wholly owned consulting subsidiary. State and central entities are the
main borrowers for REC.
Impact
Generation demand strong but T&D forms a near term lag. The working
group on power for the 11th five-year plan (FY07–12E) has estimated a 44%
shortfall in debt funding. A big beneficiary of this is REC, as it implies not only
strong demand visibility for the company but also more rational pricing in the
sector despite competition. However, we think that sluggish T&D execution
can lead to growth being ~20-22% YoY given that it forms more than 50% of
REC’s loan book.
Competition at the margins should be reduced. Banks are competing
strongly in the sector, particularly in lending to the private sector. However,
ALM mismatch concerns for banks are emerging, which should give a longterm
competitive edge to REC. With growth in other sectors, the focus on
power by the banks should fall.
Margins to come off but remain healthy. We expect cost of funds to rise as
the RBI continues to tighten rates. Historically, REC has been very good at
passing on its higher cost of funds to customers. However, with near-term
competition being high, it may not be able to do so. We expect NIMs to come
off as cost of funds rises, but the impact should be partially offset by a
matched ALM profile, higher foreign borrowings and tax-free bonds.
Asset quality – smooth sailing. REC’s portfolio quality is very good, and
gross NPLs are virtually nil. We expect asset quality to remain good based on
three broad reasons: (i) favourable macro conditions ensuring that projects
are viable and returns are high, (ii) regulatory forbearance for REC is likely to
continue, (iii) the company itself follows conservative lending practices that
should keep a lid on delinquencies.
Action and recommendation
We maintain our Outperform rating on the stock.
Rural Electrification Aide Memoire
1. How has the wholesale funding cost moved in the last six months? What was the coupon for the latest bond offering?
2. What is your outlook on the liquidity tightness? Do you think it will ease in the next two to three months?
3. What are the incremental spreads you are making on loans?
4. Where do you see your spreads stabilising in the current tightening cycle?
5. Do you see less competition from banks on the margin given their ALM concerns?
6. Do you believe lenders have pricing power in the market?
7. What are the key drivers for your loan growth going forward?
8. What are the biggest risks to project execution you are seeing in the current environment, eg, (i) lack of coal linkages, (ii)
insufficient train rakes, (iii) environmental clearances, (iv) power equipment availability, (v) political willpower to cut T&D
losses?
9. Do you also see promoter equity a constraint for execution?
10. T&D loans constitute more than 50% of your loan book. However, there are concerns that the projects are not really taking
off. What is your take on the situation? What are the biggest challenges there, and do you see the situation improving in
the next 6 to 12 months?
11. How big is the risk of defaulting SEBs to the power sector?
12. What is your contingent planning in case SEBs do default? What are the steps you take to ensure credit quality for state
loans as well as private loans?
13. What is your view on APDRP? How effective do you think the APDRP would be in cutting the losses?
14. Do you see relaxation of credit appraisal standards by lenders given strong competition?
15. What is your policy on giving loans to projects with a merchant power component? What power price per unit and interest
coverage do you insist on giving loans to such projects?
16. Are you looking to take up an equity stake in power projects? What is the company’s policy on equity participation?
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification
Premier power lender
Event
Rural Electrification Corp. is the second-largest power lender in India. It is a
nonbanking financial company with the government holding the majority
stake. REC was set up by the government in 1969 to fund rural electrification,
ie, transmission and distribution projects in rural areas. However, in 2003 the
company was permitted to lend to all types of power projects irrespective of
size or scope. The company is primarily involved in lending, although it also
has a wholly owned consulting subsidiary. State and central entities are the
main borrowers for REC.
Impact
Generation demand strong but T&D forms a near term lag. The working
group on power for the 11th five-year plan (FY07–12E) has estimated a 44%
shortfall in debt funding. A big beneficiary of this is REC, as it implies not only
strong demand visibility for the company but also more rational pricing in the
sector despite competition. However, we think that sluggish T&D execution
can lead to growth being ~20-22% YoY given that it forms more than 50% of
REC’s loan book.
Competition at the margins should be reduced. Banks are competing
strongly in the sector, particularly in lending to the private sector. However,
ALM mismatch concerns for banks are emerging, which should give a longterm
competitive edge to REC. With growth in other sectors, the focus on
power by the banks should fall.
Margins to come off but remain healthy. We expect cost of funds to rise as
the RBI continues to tighten rates. Historically, REC has been very good at
passing on its higher cost of funds to customers. However, with near-term
competition being high, it may not be able to do so. We expect NIMs to come
off as cost of funds rises, but the impact should be partially offset by a
matched ALM profile, higher foreign borrowings and tax-free bonds.
Asset quality – smooth sailing. REC’s portfolio quality is very good, and
gross NPLs are virtually nil. We expect asset quality to remain good based on
three broad reasons: (i) favourable macro conditions ensuring that projects
are viable and returns are high, (ii) regulatory forbearance for REC is likely to
continue, (iii) the company itself follows conservative lending practices that
should keep a lid on delinquencies.
Action and recommendation
We maintain our Outperform rating on the stock.
Rural Electrification Aide Memoire
1. How has the wholesale funding cost moved in the last six months? What was the coupon for the latest bond offering?
2. What is your outlook on the liquidity tightness? Do you think it will ease in the next two to three months?
3. What are the incremental spreads you are making on loans?
4. Where do you see your spreads stabilising in the current tightening cycle?
5. Do you see less competition from banks on the margin given their ALM concerns?
6. Do you believe lenders have pricing power in the market?
7. What are the key drivers for your loan growth going forward?
8. What are the biggest risks to project execution you are seeing in the current environment, eg, (i) lack of coal linkages, (ii)
insufficient train rakes, (iii) environmental clearances, (iv) power equipment availability, (v) political willpower to cut T&D
losses?
9. Do you also see promoter equity a constraint for execution?
10. T&D loans constitute more than 50% of your loan book. However, there are concerns that the projects are not really taking
off. What is your take on the situation? What are the biggest challenges there, and do you see the situation improving in
the next 6 to 12 months?
11. How big is the risk of defaulting SEBs to the power sector?
12. What is your contingent planning in case SEBs do default? What are the steps you take to ensure credit quality for state
loans as well as private loans?
13. What is your view on APDRP? How effective do you think the APDRP would be in cutting the losses?
14. Do you see relaxation of credit appraisal standards by lenders given strong competition?
15. What is your policy on giving loans to projects with a merchant power component? What power price per unit and interest
coverage do you insist on giving loans to such projects?
16. Are you looking to take up an equity stake in power projects? What is the company’s policy on equity participation?
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