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Rural Electrification Corporation Ltd Rs: 204
Macro headwinds persist Under review
We recently met the management of the bank and the key highlights of our interaction are as
follows:
Strong growth outlook amidst slowdown concerns
Management expects 25% loan growth in the current fiscal vis-à-vis 23.6% achieved in FY11. We
expect loan to grow at 21.4% CAGR over FY11-13 driven by strong sanction book of Rs 1.5 trillion
and robust power capacity addition outlook. The company intends to borrow about Rs 28,000-
30,000 crore in line with the growth in the disbursement in FY12. The company plans to raise $2.5
billion (including $1.0 billion through FCCB subject to regulatory approvals) and $1.0 billion through
ECB in FY12.
Margin under pressure
The company has been able to contain its borrowing costs due to access to competitive funding
options such as forex loans, REC bonds etc. It raised $1.2 billion from international markets in the
previous years and intends to raise $2.5 billion in current fiscal. The average borrowing cost of
foreign loans, which constitute 10.8% of the borrowings, has been hovering at ~3.2% in the last two
quarters. The overall borrowing cost in FY11 stood at 7.6% while margin and spread pegged at 4.4%
and 3.4% respectively. Management doesn’t expect any significant margin pressure in the near term
and expect to maintain 2.93% spread on incremental basis.
Stable asset quality
Management does not see any serious asset quality deterioration arising due to poor financial
health of SEBs and rising SEBs losses. None of the borrowers have defaulted so far. However,
restructuring of certain loans (forming 10-25% of the loan book) may take place whereby tenure of
the loans maybe extended from 13 years to 18 years without sacrificing any interest income.
Moreover, as a prudent measure, the management plans to provide for standard assets by setting
aside 3% of the profits subject to board’s approval.
Macro Concern – rising SEB losses
The widening gap between realizations and cost of supply has been main reason for the poor
financial health of the SEBs. However, in certain states, tariffs have been revised and some other
states are likely to revise. In some cases, a 5-10% increase in tariff may turn SEBs profitable.
Moreover, several states such as Maharashtra, Gujarat, Rajasthan and Andhra Pradesh have been
able to reduce their AT&C losses and improving their efficiencies. We believe focused schemes to
reduce A&TC losses, new subsidy system for power to agricultural sector, frequent revision in tariff
to adjust rising fuel costs will improve operating performance of state electricity utilities in
medium to long term. Deterioration of SEBs’ financial health is a key macro concern and lack of
clarity for policy response to rising SEB losses will remain a key hindrance for stock performance to
broader market in near term.
Valuation & Recommendation
The stock has corrected sharply by 35% in the last six months underperforming broader markets
such as Bankex and Sensex primarily on account of macroeconomic concerns such as delays in
power projects, rising SEBs losses and rising interest rates. At Rs 204, the stock is fairly quoting 6.9
times FY12 earnings and 1.4 times FY12 Adjusted book.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification Corporation Ltd Rs: 204
Macro headwinds persist Under review
We recently met the management of the bank and the key highlights of our interaction are as
follows:
Strong growth outlook amidst slowdown concerns
Management expects 25% loan growth in the current fiscal vis-à-vis 23.6% achieved in FY11. We
expect loan to grow at 21.4% CAGR over FY11-13 driven by strong sanction book of Rs 1.5 trillion
and robust power capacity addition outlook. The company intends to borrow about Rs 28,000-
30,000 crore in line with the growth in the disbursement in FY12. The company plans to raise $2.5
billion (including $1.0 billion through FCCB subject to regulatory approvals) and $1.0 billion through
ECB in FY12.
Margin under pressure
The company has been able to contain its borrowing costs due to access to competitive funding
options such as forex loans, REC bonds etc. It raised $1.2 billion from international markets in the
previous years and intends to raise $2.5 billion in current fiscal. The average borrowing cost of
foreign loans, which constitute 10.8% of the borrowings, has been hovering at ~3.2% in the last two
quarters. The overall borrowing cost in FY11 stood at 7.6% while margin and spread pegged at 4.4%
and 3.4% respectively. Management doesn’t expect any significant margin pressure in the near term
and expect to maintain 2.93% spread on incremental basis.
Stable asset quality
Management does not see any serious asset quality deterioration arising due to poor financial
health of SEBs and rising SEBs losses. None of the borrowers have defaulted so far. However,
restructuring of certain loans (forming 10-25% of the loan book) may take place whereby tenure of
the loans maybe extended from 13 years to 18 years without sacrificing any interest income.
Moreover, as a prudent measure, the management plans to provide for standard assets by setting
aside 3% of the profits subject to board’s approval.
Macro Concern – rising SEB losses
The widening gap between realizations and cost of supply has been main reason for the poor
financial health of the SEBs. However, in certain states, tariffs have been revised and some other
states are likely to revise. In some cases, a 5-10% increase in tariff may turn SEBs profitable.
Moreover, several states such as Maharashtra, Gujarat, Rajasthan and Andhra Pradesh have been
able to reduce their AT&C losses and improving their efficiencies. We believe focused schemes to
reduce A&TC losses, new subsidy system for power to agricultural sector, frequent revision in tariff
to adjust rising fuel costs will improve operating performance of state electricity utilities in
medium to long term. Deterioration of SEBs’ financial health is a key macro concern and lack of
clarity for policy response to rising SEB losses will remain a key hindrance for stock performance to
broader market in near term.
Valuation & Recommendation
The stock has corrected sharply by 35% in the last six months underperforming broader markets
such as Bankex and Sensex primarily on account of macroeconomic concerns such as delays in
power projects, rising SEBs losses and rising interest rates. At Rs 204, the stock is fairly quoting 6.9
times FY12 earnings and 1.4 times FY12 Adjusted book.
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