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UBS Investment Research
Rural Electrification
Management meeting takeaways
„ Management meeting to get an update
We met with CEO Mr H D Khunteta to get an update on the business. While
headwinds on power sector have increased in the last 6 months, REC maintains the
demand still is healthy while underwriting standards have become much stricter.
Management expects its loan growth of 25% in FY12 on back of strong sanctioned
pipeline while expects 15-20 bps decline in NIMs at 4.2%. Foreign borrowings are
helping cost of funds and REC is looking at $1bn FCCB in H2FY12.
„ Discussed Escrow mechanism: priority of claims
We discussed priority of claims on SEB escrow given various stakeholders (NTPC,
PFC, REC). As per REC, lenders claim is prior to rest of the stake holders;
between the lenders PFC and REC have equal claims; a part of loans are solely
escrowed to REC.
„ Drawing parallel to 2000-02 restructuring
We enquired about the experience of early 2000s where SEB dues had to be
restructured and NPL ratios witnessed a significant spike; REC maintains the
situation is vastly different where most SEB defaulted whereas currently 80% of
losses are contributed by 4-5 SEBs. Asset quality is holding up currently though
small developers (50-100 MW) projects could come under pressure. Some states
have raised tariffs (Rajasthan, Orissa, MP) while REC expects TN also to act soon.
„ Valuation: Offers value considering growth and return profile
REC is a proxy of growing investments in power sector and current valuations at
1.4x FY12 book offers value in our view considering 21% avg RoE. Maintain Buy
rating. We derive our PT from residual income based model. Our PT implies 2x
FY12E book.
Q 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.
Q 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
Management meeting takeaways
„ Management meeting to get an update
We met with CEO Mr H D Khunteta to get an update on the business. While
headwinds on power sector have increased in the last 6 months, REC maintains the
demand still is healthy while underwriting standards have become much stricter.
Management expects its loan growth of 25% in FY12 on back of strong sanctioned
pipeline while expects 15-20 bps decline in NIMs at 4.2%. Foreign borrowings are
helping cost of funds and REC is looking at $1bn FCCB in H2FY12.
„ Discussed Escrow mechanism: priority of claims
We discussed priority of claims on SEB escrow given various stakeholders (NTPC,
PFC, REC). As per REC, lenders claim is prior to rest of the stake holders;
between the lenders PFC and REC have equal claims; a part of loans are solely
escrowed to REC.
„ Drawing parallel to 2000-02 restructuring
We enquired about the experience of early 2000s where SEB dues had to be
restructured and NPL ratios witnessed a significant spike; REC maintains the
situation is vastly different where most SEB defaulted whereas currently 80% of
losses are contributed by 4-5 SEBs. Asset quality is holding up currently though
small developers (50-100 MW) projects could come under pressure. Some states
have raised tariffs (Rajasthan, Orissa, MP) while REC expects TN also to act soon.
„ Valuation: Offers value considering growth and return profile
REC is a proxy of growing investments in power sector and current valuations at
1.4x FY12 book offers value in our view considering 21% avg RoE. Maintain Buy
rating. We derive our PT from residual income based model. Our PT implies 2x
FY12E book.
Q 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.
Q 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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