India Equity Research Reports, IPO and Stock News
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● We initiate coverage of REC with an UNDERPERFORM rating
and Rs220 target price, implying 24% potential upside. We expect
significant credit quality issues to emerge over the next 12-18
months. Please click here for the full report.
● Over 50% of REC’s exposure is to distribution companies
(predominantly state government owned)—the segment where
power sector losses are concentrated. Tariff increases on the
scale required (40%+ in some of the larger states) to address
these losses look unfeasible.
● If the government were to bail out the state utilities, based on
precedent such a bailout would not be extended to REC. Further,
even if the bailout was extended, it would imply a significant drop
in profitability, replacing 11% yield loan assets with govt bonds.
Paradoxically, if state utilities were in good shape, REC’s growth
would slow down, as the utilities would have access to alternative
sources.
● We value REC at 1.0x fwd P/B. PSU banks in periods of stress
have traded at or below these multiples.
‘The Rural Electrification Corporation (REC), the Power
Finance Corporation (PFC) and Bharat Heavy Electricals
Limited (BHEL) have not been included in the scheme
because dues to these organisations are on capital
account. The Group felt that as a matter of principle, it
should not go into the recovery or rescheduling of loans
given by financial institutions, PFC and REC. These
must be left to the respective lenders and borrowers.’
– Report of the Expert Group on Settlement of SEB Dues (Chaired by MS
Ahluwalia, May 2001
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