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Rural Electrification -Loan growth moderates
For 3QFY11 REC reported net profit of Rs6.6bn, up 40% YoY, ahead of our
estimate. We were positively surprised by 20bpQoQ expansion in spreads
led by higher share of unhedged forex loans, but believe that this may
pose risk of forex losses if Rupee depreciates. Loan growth moderated to
21% due to lower growth in T&D segment, but management sees some
pick-up going forward. We expect REC to report 23% Cagr in loans over
FY10-13CL and this will drive 19% Cagr in net profit. Maintain OPF.
Lending momentum moderates, management expects a pick-up
During 3QFY11, REC’s loan growth moderated further to 21% YoY (from 26%
in 2Q and 29% in 1QFY11). Modest growth in T&D segment that constitutes
52% of loans was key reason for slowdown, but generation segment (42% of
loans) continues to report healthy growth. While there is a risk of slowdown in
capex in power sector due to tighter environmental-clearance rules and
slippage in government capex, T&D segment seems to be more exposed and
faces greater competition from banks. However, the management expects
some pick-up in loan growth over the coming quarters.
Unhedged forex borrowings support spread expansion
During 3QFY11 in spite of rise in wholesale borrowings costs, REC’s spreads
expanded by 20bps QoQ to 3.4% (up 10bps YoY). We believe this was due to
(1) rising share of unhedged forex borrowings that cost ~400bps lesser than
domestic funds and (2) higher mobilisation from capital gains tax exemption
bonds. We expect spreads to contract due to repricing of borrowings at higher
rates but, rise in share of unhedged forex loans may help to defend spreads.
However, unhedged forex loans expose earnings to the risk of forex losses;
on Dec-10 +25% of forex loans were unhedged and with new raising in Jan-
11 the proportion of unhedged forex loans will increase to +50%.
Lower exposure to merchant power; rise in merchant power rates
Management clarified that REC has been conservative in taking exposure to
merchant power projects. Currently, none of the power projects financed by
REC sell more than 30% of power on merchant power basis (40% in case of
hydro projects). Management also pointed that during Jan-11 there has been
a rise in merchant power tariffs due to pick-up in power demand.
Maintain OPF
We expect REC’s earnings to grow at 19% Cagr over FY10-13 (ex write-back
of tax in FY10) led by 23% Cagr in loans. We retain OPF reco with target price
of Rs320 based on 2x forward PB (cut from 360). Improvement in liquidity
conditions and investment outlook for power sector are key re-rating triggers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification -Loan growth moderates
For 3QFY11 REC reported net profit of Rs6.6bn, up 40% YoY, ahead of our
estimate. We were positively surprised by 20bpQoQ expansion in spreads
led by higher share of unhedged forex loans, but believe that this may
pose risk of forex losses if Rupee depreciates. Loan growth moderated to
21% due to lower growth in T&D segment, but management sees some
pick-up going forward. We expect REC to report 23% Cagr in loans over
FY10-13CL and this will drive 19% Cagr in net profit. Maintain OPF.
Lending momentum moderates, management expects a pick-up
During 3QFY11, REC’s loan growth moderated further to 21% YoY (from 26%
in 2Q and 29% in 1QFY11). Modest growth in T&D segment that constitutes
52% of loans was key reason for slowdown, but generation segment (42% of
loans) continues to report healthy growth. While there is a risk of slowdown in
capex in power sector due to tighter environmental-clearance rules and
slippage in government capex, T&D segment seems to be more exposed and
faces greater competition from banks. However, the management expects
some pick-up in loan growth over the coming quarters.
Unhedged forex borrowings support spread expansion
During 3QFY11 in spite of rise in wholesale borrowings costs, REC’s spreads
expanded by 20bps QoQ to 3.4% (up 10bps YoY). We believe this was due to
(1) rising share of unhedged forex borrowings that cost ~400bps lesser than
domestic funds and (2) higher mobilisation from capital gains tax exemption
bonds. We expect spreads to contract due to repricing of borrowings at higher
rates but, rise in share of unhedged forex loans may help to defend spreads.
However, unhedged forex loans expose earnings to the risk of forex losses;
on Dec-10 +25% of forex loans were unhedged and with new raising in Jan-
11 the proportion of unhedged forex loans will increase to +50%.
Lower exposure to merchant power; rise in merchant power rates
Management clarified that REC has been conservative in taking exposure to
merchant power projects. Currently, none of the power projects financed by
REC sell more than 30% of power on merchant power basis (40% in case of
hydro projects). Management also pointed that during Jan-11 there has been
a rise in merchant power tariffs due to pick-up in power demand.
Maintain OPF
We expect REC’s earnings to grow at 19% Cagr over FY10-13 (ex write-back
of tax in FY10) led by 23% Cagr in loans. We retain OPF reco with target price
of Rs320 based on 2x forward PB (cut from 360). Improvement in liquidity
conditions and investment outlook for power sector are key re-rating triggers.
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