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Correction provides attractive entry opportunity
Loan book to register 20% CAGR for FY11-14E: RECL has delivered robust
loan book CAGR of 25% over FY05-11. Given outstanding sanction of `1.5trn
(1.8x FY11 loan book) and investment pick-up in FY12 (being the last fiscal of
the 11th five year plan), we expect 18%/17%/17% disbursement growth in
FY12/FY13/FY14E, leading to loan book CAGR of c.20% for FY11-14E.
Margins to moderate by 17bps over FY11-14E: We expect 30bps and 17bps
decline in spreads and margins for RECL over FY11-14E driven by a) increase in
borrowing cost by c.90bps over FY11-13E, b) unfavourable ALM profile
wherein RECL has negative mismatch of `7bn in FY12E and `23bn in FY13E.
Thus we expect RECL’s spreads to decline by 35bps to 2.6% by FY12E and
improve marginally to 2.7% in FY13E. For FY14, we factor c.8bps improvement
in spread over FY13E level. Margins are expected to compress by 17bps,
implying 19% CAGR in NII over FY11-14E.
Credit losses on SEB exposure unlikely; however, we conservatively factor
credit costs of c.12bps: Given higher exposure to discoms which are incurring
significant losses currently, there has been perception of significant asset
quality pressure on RECL. However, we believe actual credit losses would not
be significant given a) escrow account mechanism and state level guarantees
on these exposure, b) recent tariff hikes which should ease the burden for
SEBs, c) In FY01-03, RECL had restructured SEB loans but without taking any
significant loss on NPV basis. However, given risks on private sector exposure,
we conservatively factor credit costs of 10bps each for FY12/FY13E and 12bps
for FY14E. Further, RECL maintains reserve for bad debts (c.0.8% of loan book)
which should act as buffer in case of any restructuring/NPLs.
Earnings CAGR of c.16% over FY11-14E with ROE of c.21%: We forecast net
profit to witness c.16% CAGR over FY11E–14E driven by 19% CAGR in NII on the
back of robust 20% loan book CAGR. However, we have modeled elevated
credit costs (12bps in FY14E vs nil in FY11) and margin decline of 17bps over
FY11-14E .RECL is expected to report healthy return ratios with ROA and ROE
of c.2.9% and c.21% respectively over FY12-14E..
Correction provides attractive entry point, initiate coverage with BUY and
`220 TP: RECL has witnessed significant de-rating from peak multiple of 2.9x
1yr fwd book to 1.1x currently. We believe current valuations are attractive at
1.1x FY13E book with dividend yield of c.5% (based on FY12E dividend). We
value the stock at 1.1x FY14P/B (at 1.15x Mar’14 ABV; adjusted for reserves
for bad and doubtful debt), implying Mar’13 target price of `220, upside of
c.23%, including dividend
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Correction provides attractive entry opportunity
Loan book to register 20% CAGR for FY11-14E: RECL has delivered robust
loan book CAGR of 25% over FY05-11. Given outstanding sanction of `1.5trn
(1.8x FY11 loan book) and investment pick-up in FY12 (being the last fiscal of
the 11th five year plan), we expect 18%/17%/17% disbursement growth in
FY12/FY13/FY14E, leading to loan book CAGR of c.20% for FY11-14E.
Margins to moderate by 17bps over FY11-14E: We expect 30bps and 17bps
decline in spreads and margins for RECL over FY11-14E driven by a) increase in
borrowing cost by c.90bps over FY11-13E, b) unfavourable ALM profile
wherein RECL has negative mismatch of `7bn in FY12E and `23bn in FY13E.
Thus we expect RECL’s spreads to decline by 35bps to 2.6% by FY12E and
improve marginally to 2.7% in FY13E. For FY14, we factor c.8bps improvement
in spread over FY13E level. Margins are expected to compress by 17bps,
implying 19% CAGR in NII over FY11-14E.
Credit losses on SEB exposure unlikely; however, we conservatively factor
credit costs of c.12bps: Given higher exposure to discoms which are incurring
significant losses currently, there has been perception of significant asset
quality pressure on RECL. However, we believe actual credit losses would not
be significant given a) escrow account mechanism and state level guarantees
on these exposure, b) recent tariff hikes which should ease the burden for
SEBs, c) In FY01-03, RECL had restructured SEB loans but without taking any
significant loss on NPV basis. However, given risks on private sector exposure,
we conservatively factor credit costs of 10bps each for FY12/FY13E and 12bps
for FY14E. Further, RECL maintains reserve for bad debts (c.0.8% of loan book)
which should act as buffer in case of any restructuring/NPLs.
Earnings CAGR of c.16% over FY11-14E with ROE of c.21%: We forecast net
profit to witness c.16% CAGR over FY11E–14E driven by 19% CAGR in NII on the
back of robust 20% loan book CAGR. However, we have modeled elevated
credit costs (12bps in FY14E vs nil in FY11) and margin decline of 17bps over
FY11-14E .RECL is expected to report healthy return ratios with ROA and ROE
of c.2.9% and c.21% respectively over FY12-14E..
Correction provides attractive entry point, initiate coverage with BUY and
`220 TP: RECL has witnessed significant de-rating from peak multiple of 2.9x
1yr fwd book to 1.1x currently. We believe current valuations are attractive at
1.1x FY13E book with dividend yield of c.5% (based on FY12E dividend). We
value the stock at 1.1x FY14P/B (at 1.15x Mar’14 ABV; adjusted for reserves
for bad and doubtful debt), implying Mar’13 target price of `220, upside of
c.23%, including dividend
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