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Rural Electrification Corporation’s (REC) Q2FY12 PAT came in at INR6.2bn
(flat YoY), marginally ahead of our estimate, as normalised NIMs
improved 8bps QoQ to 4.47%. It booked INR1.26bn MTM loss on
unhedged forex borrowings and INR346mn of one‐time upfront fee
incurred on raising ECB. Liability management continued to be
commendable as: (a) stayed away completely from bank borrowings; (b)
raised money via bond market where cost was lower QoQ; and (c)
hedged USD500mn forex borrowings in September to minimise MTM hit
due to INR depreciation. However, business growth indicators failed to
enthuse as: (1) disbursement growth slowed down to 10% YoY; and (2)
sanctions declined sharply to INR108bn (compared to INR160‐175bn run
rate). At current valuations of 1.2x FY13E book and 6.0x FY13E earnings,
the risk–reward is favourable. We maintain ‘BUY’ with TP of INR240.
Liability management continues to be commendable
With banks having aggressively raised base rates in Q2FY12, REC has completely stayed
away from bank borrowings (proportion has come off from 14% in Q1FY12 to 8% in
Q2FY12). Borrowing was skewed in favour of bonds/debentures where incremental
cost has come off 23bps QoQ. Its reliance on low-cost foreign borrowings continued in
Q2FY12 as well (raised USD300mn via ECBs); the share of forex borrowings has jumped
to 12%. Therefore, increase in blended cost of funds was capped at 40bps to 8.29%,
whereas yields improved 45bps to 11.5%. Consequently, normalised NIMs improved
8bps QoQ to 4.47% against our expectation of marginal decline. Management
indicated that in FY12E INR120bn of assets and INR90bn of liabilities will come up for
reprising. We are building in margins of 4.2-4.3% for FY12-13E.
Outlook and valuations: Risk‐reward favourable; maintain ‘BUY’
Led by concerns surrounding the power sector, REC has underperformed broader
markets by more than 26% over the past one year. We believe at the current trading
range of 1.2x FY13E book and 6.0x FY13E earnings, the risk–reward is favourable. Also,
its limited dependence on private projects, coupled with lower share of working capital
finance, offers comfort. Led by 21% CAGR in loan assets and relatively stable NIMs, we
expect 14% earnings CAGR and average ROEs of 20-21% over FY11-13E. We maintain
‘BUY/Sector Outperformer’ recommendation/rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification Corporation’s (REC) Q2FY12 PAT came in at INR6.2bn
(flat YoY), marginally ahead of our estimate, as normalised NIMs
improved 8bps QoQ to 4.47%. It booked INR1.26bn MTM loss on
unhedged forex borrowings and INR346mn of one‐time upfront fee
incurred on raising ECB. Liability management continued to be
commendable as: (a) stayed away completely from bank borrowings; (b)
raised money via bond market where cost was lower QoQ; and (c)
hedged USD500mn forex borrowings in September to minimise MTM hit
due to INR depreciation. However, business growth indicators failed to
enthuse as: (1) disbursement growth slowed down to 10% YoY; and (2)
sanctions declined sharply to INR108bn (compared to INR160‐175bn run
rate). At current valuations of 1.2x FY13E book and 6.0x FY13E earnings,
the risk–reward is favourable. We maintain ‘BUY’ with TP of INR240.
Liability management continues to be commendable
With banks having aggressively raised base rates in Q2FY12, REC has completely stayed
away from bank borrowings (proportion has come off from 14% in Q1FY12 to 8% in
Q2FY12). Borrowing was skewed in favour of bonds/debentures where incremental
cost has come off 23bps QoQ. Its reliance on low-cost foreign borrowings continued in
Q2FY12 as well (raised USD300mn via ECBs); the share of forex borrowings has jumped
to 12%. Therefore, increase in blended cost of funds was capped at 40bps to 8.29%,
whereas yields improved 45bps to 11.5%. Consequently, normalised NIMs improved
8bps QoQ to 4.47% against our expectation of marginal decline. Management
indicated that in FY12E INR120bn of assets and INR90bn of liabilities will come up for
reprising. We are building in margins of 4.2-4.3% for FY12-13E.
Outlook and valuations: Risk‐reward favourable; maintain ‘BUY’
Led by concerns surrounding the power sector, REC has underperformed broader
markets by more than 26% over the past one year. We believe at the current trading
range of 1.2x FY13E book and 6.0x FY13E earnings, the risk–reward is favourable. Also,
its limited dependence on private projects, coupled with lower share of working capital
finance, offers comfort. Led by 21% CAGR in loan assets and relatively stable NIMs, we
expect 14% earnings CAGR and average ROEs of 20-21% over FY11-13E. We maintain
‘BUY/Sector Outperformer’ recommendation/rating on the stock.
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