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UBS Investment Research
Rural Electrification
I n line quarter
Event: Q1 results lower by 4% on higher provisions
REC reported PAT of Rs 6.6 bn slightly lower than UBSe of Rs 6.9 bn (consensus
6.7 bn) up 13% y/y on account of higher credit costs. Net operating income came
better than expected at Rs 9.3 bn with stable NIMs at 4.3%. NPLs increased from
near zero levels to 0.3% due to slippage of MP based Hydel power plant (REC
exposure of Rs 2.5 bn). Approvals declined 7% y/y on account of decline in T&D
segment while disbursements grew 18% y/y. Share of private sector increased to
11% (from 10% in FY11) while generation now accounts for 43% of loans.
Impact: Broadly maintain estimates
We maintain our estimates broadly however raise our loan FY12 forecast from
20% to 22%; simultaneously we also raise our provisioning estimate as we expect
management to build up provisions given increasing proportion of private sector in
overall loan book. We are building in 15 bps decline in FY12 NIMs.
Action: Risk reward favourable, maintain positive view
We find the valuations attractive given 4.5% dividend yield, 13% EPS growth and
average RoE of 21%. Stock is currently trading at 1.3xFY12 book and 6.7xFY12
earnings. Key trigger for price performance in our view are likely reforms to
improve financial health of state utilities and government initiatives to address
issues surrounding power generation companies.
Valuation: Buy, PT of Rs275
We value the stock using residual income method at Rs275 which implies 1.6x
FY13E book and 8.4x earnings.
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.
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
I n line quarter
Event: Q1 results lower by 4% on higher provisions
REC reported PAT of Rs 6.6 bn slightly lower than UBSe of Rs 6.9 bn (consensus
6.7 bn) up 13% y/y on account of higher credit costs. Net operating income came
better than expected at Rs 9.3 bn with stable NIMs at 4.3%. NPLs increased from
near zero levels to 0.3% due to slippage of MP based Hydel power plant (REC
exposure of Rs 2.5 bn). Approvals declined 7% y/y on account of decline in T&D
segment while disbursements grew 18% y/y. Share of private sector increased to
11% (from 10% in FY11) while generation now accounts for 43% of loans.
Impact: Broadly maintain estimates
We maintain our estimates broadly however raise our loan FY12 forecast from
20% to 22%; simultaneously we also raise our provisioning estimate as we expect
management to build up provisions given increasing proportion of private sector in
overall loan book. We are building in 15 bps decline in FY12 NIMs.
Action: Risk reward favourable, maintain positive view
We find the valuations attractive given 4.5% dividend yield, 13% EPS growth and
average RoE of 21%. Stock is currently trading at 1.3xFY12 book and 6.7xFY12
earnings. Key trigger for price performance in our view are likely reforms to
improve financial health of state utilities and government initiatives to address
issues surrounding power generation companies.
Valuation: Buy, PT of Rs275
We value the stock using residual income method at Rs275 which implies 1.6x
FY13E book and 8.4x earnings.
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.
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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