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Rural Electrification Corp. (RECL)
Banks/Financial Institutions
Core performance remains strong, ADD. REC reported PAT of Rs6.6 bn, up 13% yoy
and 1% below estimates. Business traction was strong—loan growth moved up to 24%
(25% in 4QFY11) and NIM were stable qoq. Reported earnings were tampered by a
slippage (0.29% of loan book), core PBT growth was higher at 19% yoy. We tweak
estimates, retain ADD rating with price target of Rs240. The stock trades at 5.9X PER
and 1.1X PBR FY2013E.
Core earnings growth at 19%
Rural Electrification Corporation (REC) reported 19% growth in core earnings primarily on the
back of 24% loan growth. Reported NII growth was somewhat lower at 17% yoy. NII would be up
20% yoy after adjusting for the following items: forex losses of Rs70 mn and interest reversal of
Rs175 mn. PBT growth was lower at 13% due to higher operating expenses and provisions of
Rs250 mn during the quarter.
Comfort on macro environment crucial for stock performance
Steady performance. We expect REC to deliver about 20% loan growth in the medium term;
trends in NIM and provisions will likely drive earnings growth—we expect REC to deliver 12%
earnings CAGR and 20% RoE over the next two years. We retain ADD rating on REC with price
target of Rs240 (from Rs250), at our price target the stock will trade at 7.3X PER and 1.4X PBR
FY2013E.
Revision in estimates. We are tweaking our estimates to factor somewhat lower loan growth
(about 20% yoy), better-than-expected margins (we still factor 50 bps compression in spreads
between FY2011 and FY2013E) and higher provisions.
Asset quality performance for loans to private sector. REC reported a slippage (Rs2.5 bn-
0.29% of loan book) during the quarter. While the business environment remains vulnerable,
we derive comfort from the following: REC has only about 11% exposure to the private sector;
about 80% of the projects are backed by a long-term power purchase agreement (PPA), in case
of the balance 20%, at least 70% of the power produced is backed by a PPA. We expect REC
to report standard provisions (like banks) and we are hence increasing our provisioning
estimates.
Asset quality performance for loans to public sector. While we expect the business to
grow at a steady pace over the next few quarters, we believe that confidence on the
macro environment in the power sector (that has implications for growth and asset
quality performance of REC) would drive stock performance. We believe that initiatives
during 1QFY12 viz. (1) the state power ministers’ conference that resolved to take a series
of steps to bring down commercial losses and improve financial health for state utilities
and (2) tariff hikes at several state utilities, are positive in this regard. Incrementally, tariff
hikes by others states with stressed financials, demonstration of the resolve expressed by
the Government and steady financial performance of REC will likely drive up stock price,
in our view.
Higher disbursements and lower repayments pushed loan growth in 4QFY11
REC reported 24% yoy and 5% qoq loan growth. Loan approvals declined by 7% to Rs212
bn while disbursements increased by 18% yoy to Rs55 bn. The T&D sector was the key
driver of incremental business (disbursements) through approvals in this segment were down
significantly yoy.
Quarterly repayment rate declined to 1.7% in 1QFY12 as compared to 2.1% in 1QFY11.
Notably, repayment had increased to 4.3% in 3QFY11 likely due to higher competition.
We are modeling about 20% loan growth CAGR in next two years. Management has
guided for about 25% disbursement growth and 20-25% loan for next few quarters.
Spreads remain strong
REC reported margins of 4.4%—stable qoq and down from 4.6% in 1QFY11. NIM, as per
KS estimates, was down to 4.4% from 4.7% in 1QFY11. Spreads declined by 25 bps yoy
and 10 bps qoq. The company has raised lending rates by 75 bps over the last two quartersthis
will provided a cushion to its NIMs.
While incremental borrowings cost was up 2.2% yoy, outstanding borrowings cost has
increased only by 15-20 bps yoy. Key reasons for lower growth in outstanding borrowings
cost:
Bank loans (that typically have a variable rate) are only 14% of the overall borrowings as
on June 2011.
Bonds, the largest segment, comprised about 58% of overall borrowings; about 43% of
these borrowings, i.e. only 15% of total borrowings have been raised over the last four
quarters.
The share of forex loans increased to 11% from 4% in 1QFY12.
The share of capital gains bonds (issued at 6%) has declined marginally to 17% from
19% overall loans.
NPL slippage in 1QFY12
REC’s gross NPLs increased to 0.3% from 0.02% yoy. A loan of Rs2.5 bn to an hydel project
slipped into the NPL category during the quarter. REC made a provision of Rs250 mn and
reversed accrued interest of Rs175 mn on this account. The hydel project is in final stages of
completion and has recently received environmental clearance. Management is positive
about the project turning around over the next few quarters.
Notably, PFC also has an exposure to the aforesaid project. Subject to a notification from RBI,
PFC has restructured this exposure and recognizes income from this facility only on cash
basis. Unlike PFC, REC has not moved its income recognition to cash/realized from accrual.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification Corp. (RECL)
Banks/Financial Institutions
Core performance remains strong, ADD. REC reported PAT of Rs6.6 bn, up 13% yoy
and 1% below estimates. Business traction was strong—loan growth moved up to 24%
(25% in 4QFY11) and NIM were stable qoq. Reported earnings were tampered by a
slippage (0.29% of loan book), core PBT growth was higher at 19% yoy. We tweak
estimates, retain ADD rating with price target of Rs240. The stock trades at 5.9X PER
and 1.1X PBR FY2013E.
Core earnings growth at 19%
Rural Electrification Corporation (REC) reported 19% growth in core earnings primarily on the
back of 24% loan growth. Reported NII growth was somewhat lower at 17% yoy. NII would be up
20% yoy after adjusting for the following items: forex losses of Rs70 mn and interest reversal of
Rs175 mn. PBT growth was lower at 13% due to higher operating expenses and provisions of
Rs250 mn during the quarter.
Comfort on macro environment crucial for stock performance
Steady performance. We expect REC to deliver about 20% loan growth in the medium term;
trends in NIM and provisions will likely drive earnings growth—we expect REC to deliver 12%
earnings CAGR and 20% RoE over the next two years. We retain ADD rating on REC with price
target of Rs240 (from Rs250), at our price target the stock will trade at 7.3X PER and 1.4X PBR
FY2013E.
Revision in estimates. We are tweaking our estimates to factor somewhat lower loan growth
(about 20% yoy), better-than-expected margins (we still factor 50 bps compression in spreads
between FY2011 and FY2013E) and higher provisions.
Asset quality performance for loans to private sector. REC reported a slippage (Rs2.5 bn-
0.29% of loan book) during the quarter. While the business environment remains vulnerable,
we derive comfort from the following: REC has only about 11% exposure to the private sector;
about 80% of the projects are backed by a long-term power purchase agreement (PPA), in case
of the balance 20%, at least 70% of the power produced is backed by a PPA. We expect REC
to report standard provisions (like banks) and we are hence increasing our provisioning
estimates.
Asset quality performance for loans to public sector. While we expect the business to
grow at a steady pace over the next few quarters, we believe that confidence on the
macro environment in the power sector (that has implications for growth and asset
quality performance of REC) would drive stock performance. We believe that initiatives
during 1QFY12 viz. (1) the state power ministers’ conference that resolved to take a series
of steps to bring down commercial losses and improve financial health for state utilities
and (2) tariff hikes at several state utilities, are positive in this regard. Incrementally, tariff
hikes by others states with stressed financials, demonstration of the resolve expressed by
the Government and steady financial performance of REC will likely drive up stock price,
in our view.
Higher disbursements and lower repayments pushed loan growth in 4QFY11
REC reported 24% yoy and 5% qoq loan growth. Loan approvals declined by 7% to Rs212
bn while disbursements increased by 18% yoy to Rs55 bn. The T&D sector was the key
driver of incremental business (disbursements) through approvals in this segment were down
significantly yoy.
Quarterly repayment rate declined to 1.7% in 1QFY12 as compared to 2.1% in 1QFY11.
Notably, repayment had increased to 4.3% in 3QFY11 likely due to higher competition.
We are modeling about 20% loan growth CAGR in next two years. Management has
guided for about 25% disbursement growth and 20-25% loan for next few quarters.
Spreads remain strong
REC reported margins of 4.4%—stable qoq and down from 4.6% in 1QFY11. NIM, as per
KS estimates, was down to 4.4% from 4.7% in 1QFY11. Spreads declined by 25 bps yoy
and 10 bps qoq. The company has raised lending rates by 75 bps over the last two quartersthis
will provided a cushion to its NIMs.
While incremental borrowings cost was up 2.2% yoy, outstanding borrowings cost has
increased only by 15-20 bps yoy. Key reasons for lower growth in outstanding borrowings
cost:
Bank loans (that typically have a variable rate) are only 14% of the overall borrowings as
on June 2011.
Bonds, the largest segment, comprised about 58% of overall borrowings; about 43% of
these borrowings, i.e. only 15% of total borrowings have been raised over the last four
quarters.
The share of forex loans increased to 11% from 4% in 1QFY12.
The share of capital gains bonds (issued at 6%) has declined marginally to 17% from
19% overall loans.
NPL slippage in 1QFY12
REC’s gross NPLs increased to 0.3% from 0.02% yoy. A loan of Rs2.5 bn to an hydel project
slipped into the NPL category during the quarter. REC made a provision of Rs250 mn and
reversed accrued interest of Rs175 mn on this account. The hydel project is in final stages of
completion and has recently received environmental clearance. Management is positive
about the project turning around over the next few quarters.
Notably, PFC also has an exposure to the aforesaid project. Subject to a notification from RBI,
PFC has restructured this exposure and recognizes income from this facility only on cash
basis. Unlike PFC, REC has not moved its income recognition to cash/realized from accrual.
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