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Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification Corp
Reuters: RURL.BO Bloomberg: RECL IN Exchange: BSE Ticker: RURL
Concerns on asset quality
overdone, maintaining Buy
Stable & profitable growth at attractive valuations; Buy - target price INR280
We believe that REC is on track to deliver a disbursement growth of ~22% over
FY11-13E on the back of healthy sanctions. A diversified funding mix – especially
access to low-cost overseas funds – should enable REC to maintain stable
spreads. SEBs are reforming themselves, which should enable them to bring
down their losses. The concerns over asset quality for REC are overdone, in our
view. The stock is down 21.5% over the past 6M (Sensex -5%) and is trading at an
attractive valuation of 1.2x FY12E P/B with FY12E RoE of 21%.
SEB reforms underway; asset quality unlikely to deteriorate much
1QFY12 NPL of INR2.5bn was on account of a single project which is delayed due
to a lack of equity funds and REC expects this to be resolved over the next 2-3
quarters. REC indicated that most of the State Electricity Boards (SEBs) are
implementing reforms to bring down their losses and are also contemplating
significant tariff increases. For incremental sanctions, REC is building in more
stringent pre-conditions like the signing of fuel supply agreements (FSA), power
purchase agreements (PPA), advance payments of cash for subsidies given by the
states, etc. Even in the case of private exposure, REC is pricing the risk by lending
at rates 75-100bps higher than for state projects.
Diversified funding mix; likely to make std. provisions
REC has a well diversified funding fix – for FY12 they expect foreign currency
borrowings to contribute ~25% of incremental borrowings. Even on a fully-hedged
basis, foreign currency loans are ~200bps cheaper than domestic loans, which
lower the overall funding costs and hence should enable them to protect the NIM.
Management indicated that they are considering making standard asset provisions
at 2%-3% of PBT starting FY12. In our current estimates, we have factored in NPL
provisions of 15bps/20bps for FY12E/FY13E respectively.
P/BV-RoE valuation; sharp rise in wholesale funding cost is the key risk
We value RECL on a single stage GGM - P/BV = (RoE–g)/(CoE–g) - FY12E RoE
21.0%, schematic RoE 19.8%, COE 14.6%, TGR 5%. Key risks: a sharp rise in
funding costs could put pressure on spreads and the inability of SEBs to bring
down their losses could lead to higher-than-estimated NPLs.
Key takeaways from post-results conference call
On the Hydel project which turned NPL in 1QFY12
„ The project started in 1997-98 and about 85% of the project is now complete.
„ It requires another INR11bn of funds – most of which needs to be equity.
„ In 2005, PFC took over the management of the project. They are looking to get in new
equity investors, which should happen over the next 2-3 quarters.
„ Interest income of INR250m was reversed on account of this project during 1QFY12 –
INR180m for 3QFY11 and 4QFY11 and INR80mn for 1QFY12.
„ The project cost has increased from the initial estimate of INR27bn to INR43bn now.
PPA for the project will have to be re-negotiated at higher tariffs as the cost of
production has gone up.
On State Electricity Boards (SEBs)
„ REC’s exposure to Tamil Nadu (TN) SEB is INR70bn. TN SEB has not yet defaulted on
any payments to REC.
„ TN SEB is likely to raise tariffs post October 2011. The TN state government is also
considering making the subsidy payments to the SEB.
„ Given the state of affairs at SEBs, most lenders are not willing to offer short-term loans
to them and hence these SEBs – TN, Punjab, Haryana, Rajasthan, UP – are considering
raising tariffs.
Borrowing plans
„ Currently REC has RBI approval to raise $750m from overseas, which they plan to raise
by October 2011 – they have already tied up US$500m of funds.
„ After that, REC will again approach RBI for permission to raise another $750m by March
2012.
„ Separately, REC has also approached the Ministry of Power for approval to raise $1bn via
FCCBs. The FCCB would be an unsecured instrument without any government
guarantee. Government may not participate in the issue, which means that post FCCB
conversion, the government stake would decline to ~56%.
„ The fully-hedged cost of overseas borrowing works out to 7.45% to 7.5%, which is
~200bps cheaper than the domestic borrowing rate of 9.5%.
Others
„ State-owned NBFCs are not required to make standard asset provisions as per RBI
norms. The board is considering a proposal to make provisions @ 2%-3% of PBT as a
proactive measure – they may start doing this from 3QFY11.
„ REC has thus far sanctioned loans to projects adding up to ~67,000 MW where REC is
the sole or the primary company financing the project. Of these, ~7,000MW have been
commissioned.
„ In the case of private sector generation projects, REC lends at rates 75 to 100bps higher
than for the state sector. Lending rates for state generation and the T&D sector are the
same.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification Corp
Reuters: RURL.BO Bloomberg: RECL IN Exchange: BSE Ticker: RURL
Concerns on asset quality
overdone, maintaining Buy
Stable & profitable growth at attractive valuations; Buy - target price INR280
We believe that REC is on track to deliver a disbursement growth of ~22% over
FY11-13E on the back of healthy sanctions. A diversified funding mix – especially
access to low-cost overseas funds – should enable REC to maintain stable
spreads. SEBs are reforming themselves, which should enable them to bring
down their losses. The concerns over asset quality for REC are overdone, in our
view. The stock is down 21.5% over the past 6M (Sensex -5%) and is trading at an
attractive valuation of 1.2x FY12E P/B with FY12E RoE of 21%.
SEB reforms underway; asset quality unlikely to deteriorate much
1QFY12 NPL of INR2.5bn was on account of a single project which is delayed due
to a lack of equity funds and REC expects this to be resolved over the next 2-3
quarters. REC indicated that most of the State Electricity Boards (SEBs) are
implementing reforms to bring down their losses and are also contemplating
significant tariff increases. For incremental sanctions, REC is building in more
stringent pre-conditions like the signing of fuel supply agreements (FSA), power
purchase agreements (PPA), advance payments of cash for subsidies given by the
states, etc. Even in the case of private exposure, REC is pricing the risk by lending
at rates 75-100bps higher than for state projects.
Diversified funding mix; likely to make std. provisions
REC has a well diversified funding fix – for FY12 they expect foreign currency
borrowings to contribute ~25% of incremental borrowings. Even on a fully-hedged
basis, foreign currency loans are ~200bps cheaper than domestic loans, which
lower the overall funding costs and hence should enable them to protect the NIM.
Management indicated that they are considering making standard asset provisions
at 2%-3% of PBT starting FY12. In our current estimates, we have factored in NPL
provisions of 15bps/20bps for FY12E/FY13E respectively.
P/BV-RoE valuation; sharp rise in wholesale funding cost is the key risk
We value RECL on a single stage GGM - P/BV = (RoE–g)/(CoE–g) - FY12E RoE
21.0%, schematic RoE 19.8%, COE 14.6%, TGR 5%. Key risks: a sharp rise in
funding costs could put pressure on spreads and the inability of SEBs to bring
down their losses could lead to higher-than-estimated NPLs.
Key takeaways from post-results conference call
On the Hydel project which turned NPL in 1QFY12
„ The project started in 1997-98 and about 85% of the project is now complete.
„ It requires another INR11bn of funds – most of which needs to be equity.
„ In 2005, PFC took over the management of the project. They are looking to get in new
equity investors, which should happen over the next 2-3 quarters.
„ Interest income of INR250m was reversed on account of this project during 1QFY12 –
INR180m for 3QFY11 and 4QFY11 and INR80mn for 1QFY12.
„ The project cost has increased from the initial estimate of INR27bn to INR43bn now.
PPA for the project will have to be re-negotiated at higher tariffs as the cost of
production has gone up.
On State Electricity Boards (SEBs)
„ REC’s exposure to Tamil Nadu (TN) SEB is INR70bn. TN SEB has not yet defaulted on
any payments to REC.
„ TN SEB is likely to raise tariffs post October 2011. The TN state government is also
considering making the subsidy payments to the SEB.
„ Given the state of affairs at SEBs, most lenders are not willing to offer short-term loans
to them and hence these SEBs – TN, Punjab, Haryana, Rajasthan, UP – are considering
raising tariffs.
Borrowing plans
„ Currently REC has RBI approval to raise $750m from overseas, which they plan to raise
by October 2011 – they have already tied up US$500m of funds.
„ After that, REC will again approach RBI for permission to raise another $750m by March
2012.
„ Separately, REC has also approached the Ministry of Power for approval to raise $1bn via
FCCBs. The FCCB would be an unsecured instrument without any government
guarantee. Government may not participate in the issue, which means that post FCCB
conversion, the government stake would decline to ~56%.
„ The fully-hedged cost of overseas borrowing works out to 7.45% to 7.5%, which is
~200bps cheaper than the domestic borrowing rate of 9.5%.
Others
„ State-owned NBFCs are not required to make standard asset provisions as per RBI
norms. The board is considering a proposal to make provisions @ 2%-3% of PBT as a
proactive measure – they may start doing this from 3QFY11.
„ REC has thus far sanctioned loans to projects adding up to ~67,000 MW where REC is
the sole or the primary company financing the project. Of these, ~7,000MW have been
commissioned.
„ In the case of private sector generation projects, REC lends at rates 75 to 100bps higher
than for the state sector. Lending rates for state generation and the T&D sector are the
same.
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