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UBS Investment Research
Rural Electrification
Margins improve on lower cost of funds
Numbers above estimates on NIM expansion
REC reported Q3 PAT of Rs 6.6 bn (up 40% Y/Y) ahead of UBSe and consensus
estimate of Rs 6.1 bn as Net interest income grew 36% to Rs 8.5 bn (better than Rs
8.1 bn estimated) as NIMs expanded 17 bps Q/Q to 4.6% on back of lower cost of
funds. Other operating income (6% of overall revenues) came higher than
estimated due to one off repayment penalty of Rs 310 mn.
NIMs likely to be sustained in Q4, to trend down in FY12
With nearly $450 mn of ECB raised in Q2, cost of funds during Q3 declined 16
bps, as a result of which spreads were maintained at 3.6%. REC has raised another
$500 mn in Jan and intends to raise another $250 mn before march which should
help maintain spreads/NIMs in Q4 as well. Lending rate hike of 25 bps in Jan will
also help offset domestic cost pressure. However we expect 20 bps decline in
NIMs in FY12 due to lag in re-pricing of borrowings.
Loan growth of 21% in FY11, expected to pick up in FY12
Disbursements during 9MFY11 grew 7% to Rs 162 bn and company targets FY11
disbursements at Rs 230 bn which should translate into ~21% growth in FY11.
With FY12 being final year of XI five year plan, we expect loan growth of 24%.
The loan mix has remained stable with Generation at 42% and T&D at 52%.
Valuation: Raising FY11 estimate by 4%, Maintain FY12E numbers
We are incorporating better NIMs in FY11E due to higher proportion of foreign
borrowings. We maintain BUY with PT of Rs 330 derived using residual income
model.
Rural Electrification
Rural Electrification Corporation (REC) is a Navratna Central Public Sector
Enterprise in which the government of India has a 67% stake. It was established
in 1969 and listed on the BSE in 2008. Its main objective is to finance and
promote rural electrification projects across the country. The company had an
asset base of Rs692bn as at June 2010. It disbursed Rs271bn in FY10. In
February 2010, REC raised Rs26bn through a secondary offering.
Statement of Risk
We believe a slowdown in power sector investment could impact the company’s
growth outlook. Execution delays could affect the cash flow generating
capability of its projects. Favourable funding options—in the form of
infrastructure bonds and ECB issuances—if disallowed, could impact the
profitability of the business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Rural Electrification
Margins improve on lower cost of funds
Numbers above estimates on NIM expansion
REC reported Q3 PAT of Rs 6.6 bn (up 40% Y/Y) ahead of UBSe and consensus
estimate of Rs 6.1 bn as Net interest income grew 36% to Rs 8.5 bn (better than Rs
8.1 bn estimated) as NIMs expanded 17 bps Q/Q to 4.6% on back of lower cost of
funds. Other operating income (6% of overall revenues) came higher than
estimated due to one off repayment penalty of Rs 310 mn.
NIMs likely to be sustained in Q4, to trend down in FY12
With nearly $450 mn of ECB raised in Q2, cost of funds during Q3 declined 16
bps, as a result of which spreads were maintained at 3.6%. REC has raised another
$500 mn in Jan and intends to raise another $250 mn before march which should
help maintain spreads/NIMs in Q4 as well. Lending rate hike of 25 bps in Jan will
also help offset domestic cost pressure. However we expect 20 bps decline in
NIMs in FY12 due to lag in re-pricing of borrowings.
Loan growth of 21% in FY11, expected to pick up in FY12
Disbursements during 9MFY11 grew 7% to Rs 162 bn and company targets FY11
disbursements at Rs 230 bn which should translate into ~21% growth in FY11.
With FY12 being final year of XI five year plan, we expect loan growth of 24%.
The loan mix has remained stable with Generation at 42% and T&D at 52%.
Valuation: Raising FY11 estimate by 4%, Maintain FY12E numbers
We are incorporating better NIMs in FY11E due to higher proportion of foreign
borrowings. We maintain BUY with PT of Rs 330 derived using residual income
model.
Rural Electrification
Rural Electrification Corporation (REC) is a Navratna Central Public Sector
Enterprise in which the government of India has a 67% stake. It was established
in 1969 and listed on the BSE in 2008. Its main objective is to finance and
promote rural electrification projects across the country. The company had an
asset base of Rs692bn as at June 2010. It disbursed Rs271bn in FY10. In
February 2010, REC raised Rs26bn through a secondary offering.
Statement of Risk
We believe a slowdown in power sector investment could impact the company’s
growth outlook. Execution delays could affect the cash flow generating
capability of its projects. Favourable funding options—in the form of
infrastructure bonds and ECB issuances—if disallowed, could impact the
profitability of the business.
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