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Rural Electrification Corporation Ltd — SEB
issue overdone; Risk-return attractive, Buy
Price Objective Change
SEB: REC exposure to ‘Working Capital’ lending is <5-6%
The last few weeks have seen lot of news flow highlighting concerns of possible
State Electricity Board (SEBs) defaults and the potential impact on REC.
Collectively, the health of SEBs has deteriorated further over the last few years
(losses of ~Rs1.1trn over FY09-11) owing to absence of regular / adequate tariff
hikes. While REC has overall exposure of 51% of o/s loans to the transmission
and distribution (T&D) sector, its working capital loans to SEBs, which are more
vulnerable, is <5-6%.
Tamil Nadu exposure: in media glare
The recent SEB issue was compounded by media articles detailing rising Tamil
Nadu Electricity Board losses of Rs100bn/ annually. TNEB is among the few
larger SEBs making losses. TNEB’s annual revenues are ~Rs225bn, while its
debt servicing requirement is ~Rs48bn. Moreover, we believe any defaults at
discom level cannot be ringfenced and would necessarily hurt the entire value
chain. REC’s exposure is ~13% (or Rs11bn) of loans to TNEB, but +60-65% of
this is for new generation capacity (~4000MW) that is likely to come onstream in
FY12.
Lower PO on EPS cut, but risk-return attractive; Buy
The recent SEBs default scare has hurt REC’s stock perf. (down ~40% YTD), but
we believe large-scale NPLs are unlikely, given escrow/state govt. guarantees in
place and the sector’s importance. However, we think restructuring is possible.
Post our discussion with REC, we still think operating earnings will grow at +20%
yoy in FY12. However, we cut earnings by +4/3% for FY12/13E (earnings growth
at +13/20%) to factor in higher credit costs. Our PO cut to Rs255 also factors in
de-rating due to pronounced headwinds. But risk-return seems attractive, with
RoEs of +21/22% in FY12E/13E; the stock is trading at 1.4x FY12EBV (1.2x
FY13EBV).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification Corporation Ltd — SEB
issue overdone; Risk-return attractive, Buy
Price Objective Change
SEB: REC exposure to ‘Working Capital’ lending is <5-6%
The last few weeks have seen lot of news flow highlighting concerns of possible
State Electricity Board (SEBs) defaults and the potential impact on REC.
Collectively, the health of SEBs has deteriorated further over the last few years
(losses of ~Rs1.1trn over FY09-11) owing to absence of regular / adequate tariff
hikes. While REC has overall exposure of 51% of o/s loans to the transmission
and distribution (T&D) sector, its working capital loans to SEBs, which are more
vulnerable, is <5-6%.
Tamil Nadu exposure: in media glare
The recent SEB issue was compounded by media articles detailing rising Tamil
Nadu Electricity Board losses of Rs100bn/ annually. TNEB is among the few
larger SEBs making losses. TNEB’s annual revenues are ~Rs225bn, while its
debt servicing requirement is ~Rs48bn. Moreover, we believe any defaults at
discom level cannot be ringfenced and would necessarily hurt the entire value
chain. REC’s exposure is ~13% (or Rs11bn) of loans to TNEB, but +60-65% of
this is for new generation capacity (~4000MW) that is likely to come onstream in
FY12.
Lower PO on EPS cut, but risk-return attractive; Buy
The recent SEBs default scare has hurt REC’s stock perf. (down ~40% YTD), but
we believe large-scale NPLs are unlikely, given escrow/state govt. guarantees in
place and the sector’s importance. However, we think restructuring is possible.
Post our discussion with REC, we still think operating earnings will grow at +20%
yoy in FY12. However, we cut earnings by +4/3% for FY12/13E (earnings growth
at +13/20%) to factor in higher credit costs. Our PO cut to Rs255 also factors in
de-rating due to pronounced headwinds. But risk-return seems attractive, with
RoEs of +21/22% in FY12E/13E; the stock is trading at 1.4x FY12EBV (1.2x
FY13EBV).
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