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Rural Electrification Corp. (RECL)
Banks/Financial Institutions
Lower growth though margins surprise, retain REDUCE. REC reported PAT of Rs6.6
bn, up 40% yoy and 10% above estimates. Business traction was somewhat lower—
flat disbursements, loan growth at 20% as compared to 27-29% in the past though
lower borrowings cost supported margins for the quarter. We tweak estimates, retain
REDUCE with price target of Rs275 (Rs300 earlier).
Growth moderated qoq
REC’s reported NII was up 37% yoy to Rs9 bn on the back of 20% loan growth and higher
margins. Loan approvals were up 2% yoy while disbursements were down 1% yoy. While
disbursements to T&D segment picked up in 3QFY11, a high base of short-term loans in 3QFY10
pulled down growth. We believe that infrastructure finance business tends to be lumpy and
challenging to track on a qoq basis; However, consistent decline in loan growth is a cause of
concern. Notably, REC’s loan growth has reported a declining trend—29% in 4QFY10, 27% in
1QFY11, 25% in 2QFY11 and 20% in 3QFY11. We believe that growth at REC will moderate to
about 20-22% levels from 27% loan book CAGR between FY2007 and FY2010 likely due to high
base and lower traction in the T&D segment.
Spreads surprise during the quarter, trend in spreads crucial
REC reported margins of 4.8% during the quarter, somewhat above 4.6% in 2QFY11 and 4.3% in
3QFY10. Spreads, as per KIE estimates, were up to 3.3% versus 3.1% in 2QFY11.
While REC’s loan yields were stable qoq at 11.1%, its borrowings cost declined by 17 bps boosting
its spreads. Marginal borrowings cost was up to 7.8% in 3QFY11 from 7.4% in 2QFY11.
However, repayment of some of the high-priced borrowings and converting floating rate liabilities
into fixed rate liabilities has boosted spreads during the quarter. The company has un-hedged
forex debt of about US$270 mn on which the company booked marginal capital gains—included
in other income.
We believe that rise in bulk borrowings rates will likely be reflected in REC’s financials in the near
term. We are modeling 40 bps spread compression in our model in light of the following risks:
In FY2011E, about Rs100 bn of REC’s loan assets are due for re-pricing as compared to Rs50-60
bn of borrowings—favorable re-pricing of assets as compared to liabilities supported REC’s
spreads, the benefit is unlikely to extend in FY2012E.
Higher share of private sector business (in the XII 5- year Plan) will likely increase
competition for these companies and put pressure on margins.
Lending rates have been stable for last few quarters, the company has the option to raise
its PLR to support spreads—this provides some upside risk.
Asset quality performance stable, standard asset provisions pose downside risk
REC’s gross NPLs remained stable at 0.03%. Consequently, NPL cost was nil. The RBI
notification dated Jan 17, 2011, requires banks to make provisions of 25 bps on all standard
assets. REC has not made this provisions during the quarter. According to the company,
Government-owned NBFCs (like PFC and REC) do not need to follow most norms applicable
to other NBFCs, as such REC may not have to make this provision though we still don’t have
full clarity on this. REC will need to make provisions of Rs2 bn, i.e. 25% of 4QFY11E PBT in
case the company has to comply with the same, we are not factoring standard asset
provisions in our estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification Corp. (RECL)
Banks/Financial Institutions
Lower growth though margins surprise, retain REDUCE. REC reported PAT of Rs6.6
bn, up 40% yoy and 10% above estimates. Business traction was somewhat lower—
flat disbursements, loan growth at 20% as compared to 27-29% in the past though
lower borrowings cost supported margins for the quarter. We tweak estimates, retain
REDUCE with price target of Rs275 (Rs300 earlier).
Growth moderated qoq
REC’s reported NII was up 37% yoy to Rs9 bn on the back of 20% loan growth and higher
margins. Loan approvals were up 2% yoy while disbursements were down 1% yoy. While
disbursements to T&D segment picked up in 3QFY11, a high base of short-term loans in 3QFY10
pulled down growth. We believe that infrastructure finance business tends to be lumpy and
challenging to track on a qoq basis; However, consistent decline in loan growth is a cause of
concern. Notably, REC’s loan growth has reported a declining trend—29% in 4QFY10, 27% in
1QFY11, 25% in 2QFY11 and 20% in 3QFY11. We believe that growth at REC will moderate to
about 20-22% levels from 27% loan book CAGR between FY2007 and FY2010 likely due to high
base and lower traction in the T&D segment.
Spreads surprise during the quarter, trend in spreads crucial
REC reported margins of 4.8% during the quarter, somewhat above 4.6% in 2QFY11 and 4.3% in
3QFY10. Spreads, as per KIE estimates, were up to 3.3% versus 3.1% in 2QFY11.
While REC’s loan yields were stable qoq at 11.1%, its borrowings cost declined by 17 bps boosting
its spreads. Marginal borrowings cost was up to 7.8% in 3QFY11 from 7.4% in 2QFY11.
However, repayment of some of the high-priced borrowings and converting floating rate liabilities
into fixed rate liabilities has boosted spreads during the quarter. The company has un-hedged
forex debt of about US$270 mn on which the company booked marginal capital gains—included
in other income.
We believe that rise in bulk borrowings rates will likely be reflected in REC’s financials in the near
term. We are modeling 40 bps spread compression in our model in light of the following risks:
In FY2011E, about Rs100 bn of REC’s loan assets are due for re-pricing as compared to Rs50-60
bn of borrowings—favorable re-pricing of assets as compared to liabilities supported REC’s
spreads, the benefit is unlikely to extend in FY2012E.
Higher share of private sector business (in the XII 5- year Plan) will likely increase
competition for these companies and put pressure on margins.
Lending rates have been stable for last few quarters, the company has the option to raise
its PLR to support spreads—this provides some upside risk.
Asset quality performance stable, standard asset provisions pose downside risk
REC’s gross NPLs remained stable at 0.03%. Consequently, NPL cost was nil. The RBI
notification dated Jan 17, 2011, requires banks to make provisions of 25 bps on all standard
assets. REC has not made this provisions during the quarter. According to the company,
Government-owned NBFCs (like PFC and REC) do not need to follow most norms applicable
to other NBFCs, as such REC may not have to make this provision though we still don’t have
full clarity on this. REC will need to make provisions of Rs2 bn, i.e. 25% of 4QFY11E PBT in
case the company has to comply with the same, we are not factoring standard asset
provisions in our estimates.
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