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Rural Electrification Corp's (RECL) 3QFY12 PAT grew 16% YoY and 24% QoQ to INR7.7b (15% higher than estimates),
helped by a forex gain of INR866m. Loan growth remained healthy at 25% YoY but reported margins contracted
13bp QoQ. Asset quality deteriorated with one large power project being classified as NPA. Key highlights:
NII grew 18.5% YoY and 5.8% QoQ to INR10b; in line with our estimates. However, reported NIM contracted
13bp sequentially to 4.34% mainly on account of reversal in interest income to the tune of ~INR220m (due to
a large power project being classified as non-performing), which impacted yield on loans.
Loans grew 25% YoY and 5% QoQ to INR950b. The overall loan mix remained fairly stable. Exposure to private
sector continued to inch up steadily, rising to 12% v/s 11.2% in 2QFY12 and 9.1% in 3QFY11.
RECL booked forex gain of INR866m (v/s estimates of a forex loss of INR1b) due to change in accounting
treatment for foreign currency translation difference. Had the company followed the old accounting method,
the 9MFY12. PAT would have been lower by INR1.97b.
Asset quality deteriorated with GNPAs increasing to INR4.9b from INR2.7b in 2QFY12, on account of one large
gas based power project being classified as NPA. RECL's exposure to this project stood at INR2.2b.
Valuation and view: We fine tune our earnings estimates and expect earnings CAGR of 16%, with average RoAs of
~3% over FY12/13. While we expect RoA to decline ~25bp over FY11-FY13 owing to a compression in NIMs, RoE
would continue to remain strong at 21-22% as REC leverages its capital. Stock trades at 1.1x FY13E BV. Buy.
Sanctions and disbursements growth moderates: Sanctions declined by 17% YoY (and
18% QoQ) to INR88b, while disbursements increased by 5% YoY and 4% QoQ to INR63b.
Incrementally, 46% of sanctions were in the Generation segment (v/s 27% in 2QFY12)
and 42% in the T&D segment (v/s 59% in 2QFY12). Disbursements growth too remained
slower as it grew by 4% QoQ to INR63b, of which, 43% of the disbursements were in
the generation segment (v/s 59% in 2QFY12), followed by 39% in the T&D segment
(v/s 41% in 2QFY12).
Disbursements of short term loans increased sharply to INR11.5b from INR6.3b in
2QFY12. RECL started disbursing short term loans to SEBs subject to fulfillment of
certain pre-requisite conditions such as 1) tariff hike 2) government guarantee 3)
proof of filing of tariff hike petition etc, which reduces the risk on incremental lending
done to SEBs. The management remains fairly conscious about the developments in
the power sector. Reformatory steps by government addressing the issues of the
power / infrastructure sector could boost growth going forward.
Loan growth remains healthy: Loan book grew at a healthy pace at 25% YoY and 5%
QoQ to INR950b. Segmental loan mix remained fairly stable with T&D segment
constituting ~49% of loan book while generation segment constituted ~45%. Despite
moderation in the pace of sanctions and disbursements, loan growth continues to
remain healthy. Based on borrower wise classification, exposure to state entities
stood at 82% of loan book. The share of private sector has increased further to 12%
from 11.2% in 2QFY12 and 9.1% a year ago. Incremental loans and borrowings for the
quarter stood at INR46b and INR54b respectively.
Reported margins contract 13bp QoQ to 4.34%: NII grew 18.5% YoY and 5.8% QoQ to
INR10.0b; in line with our estimates. Healthy asset growth could not translate into
similar kind of topline performance as reported net interest margin contracted by
13bp QoQ to 4.34%. The pressure on margins could be mainly attributed to the reversal
of interest income to the tune of ~INR220m on account of classification of one large
project as non-performing. As a result, the yield on loans remained largely flattish
QoQ at 11.44% v/s 11.42% in 2QFY12.
Foreign borrowings help to maintain a tight leash on cost of funds: RECL maintained
tight leash on cost of funds with incremental cost of borrowings remaining stable
QoQ at 8.82% despite a large chunk of the incremental borrowings (~79%) done through
bonds, which is commendable. Importantly, proportion of bank and FI borrowing
continued to decline to INR55b vs INR63b a quarter ago. Moreover, the share of foreign
currency borrowings has been steadily increasing which also has helped RECL to keep
its cost of funds under check.
Asset quality deteriorates due to a large power project classified as NPA: Asset quality
deteriorated with GNPAs nearly doubling to INR4.9b from INR2.7b in 2QFY12 on account
of one large gas based power project being classified as NPA. RECL's exposure to this
project stood at INR2.2b. Consequently, the company made provisions worth INR241m
during the quarter. RECL has not made any standard asset provisions and will take a
call on the same in the coming quarter. With the rising risk quotient for SEB loans and
sharply increasing private sector loans proportion, no standard asset provisioning
continuous to remain a concern.
Other highlights
Employee expenses more than doubled QoQ to INR680m due to a one time
provision of ~INR400m providing for arrears of baseline incentives (for 2009-10
and 2010-11) paid to its employees.
As at end of 3QFY12, REC's capital adequacy stood at 17.4% v/s 18.1% as on 2QFY12.
Valuation and view: With a strong sanctions pipeline, loan growth is likely to remain
healthy at 21% CAGR over FY11-13E. However, in current macroeconomic environment,
asset quality is a bigger concern as against fears of slowdown in growth. Rising SEB
losses are driving up the risk quotient, more so for REC given its higher exposure to
the T&D segment. However, government's continued thrust on power sector reforms,
recourse to SEB collections through an escrow mechanism and recent tariff hikes by
various SEBs provides some comfort.
We fine tune our earnings estimates and expect earnings CAGR of 16%, with average
RoA's of ~3% over FY12/13E. While we expect ROA to decline by ~25bp over FY11-FY13
owing to a compression in NIMs and building in some credit cost, ROE would continue
to remain strong at 21-22% as REC leverages its capital. The stock trades at 1.1x FY13E
BV. We maintain Buy with a target price of INR235 (1.4x FY13E BV).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification Corp's (RECL) 3QFY12 PAT grew 16% YoY and 24% QoQ to INR7.7b (15% higher than estimates),
helped by a forex gain of INR866m. Loan growth remained healthy at 25% YoY but reported margins contracted
13bp QoQ. Asset quality deteriorated with one large power project being classified as NPA. Key highlights:
NII grew 18.5% YoY and 5.8% QoQ to INR10b; in line with our estimates. However, reported NIM contracted
13bp sequentially to 4.34% mainly on account of reversal in interest income to the tune of ~INR220m (due to
a large power project being classified as non-performing), which impacted yield on loans.
Loans grew 25% YoY and 5% QoQ to INR950b. The overall loan mix remained fairly stable. Exposure to private
sector continued to inch up steadily, rising to 12% v/s 11.2% in 2QFY12 and 9.1% in 3QFY11.
RECL booked forex gain of INR866m (v/s estimates of a forex loss of INR1b) due to change in accounting
treatment for foreign currency translation difference. Had the company followed the old accounting method,
the 9MFY12. PAT would have been lower by INR1.97b.
Asset quality deteriorated with GNPAs increasing to INR4.9b from INR2.7b in 2QFY12, on account of one large
gas based power project being classified as NPA. RECL's exposure to this project stood at INR2.2b.
Valuation and view: We fine tune our earnings estimates and expect earnings CAGR of 16%, with average RoAs of
~3% over FY12/13. While we expect RoA to decline ~25bp over FY11-FY13 owing to a compression in NIMs, RoE
would continue to remain strong at 21-22% as REC leverages its capital. Stock trades at 1.1x FY13E BV. Buy.
Sanctions and disbursements growth moderates: Sanctions declined by 17% YoY (and
18% QoQ) to INR88b, while disbursements increased by 5% YoY and 4% QoQ to INR63b.
Incrementally, 46% of sanctions were in the Generation segment (v/s 27% in 2QFY12)
and 42% in the T&D segment (v/s 59% in 2QFY12). Disbursements growth too remained
slower as it grew by 4% QoQ to INR63b, of which, 43% of the disbursements were in
the generation segment (v/s 59% in 2QFY12), followed by 39% in the T&D segment
(v/s 41% in 2QFY12).
Disbursements of short term loans increased sharply to INR11.5b from INR6.3b in
2QFY12. RECL started disbursing short term loans to SEBs subject to fulfillment of
certain pre-requisite conditions such as 1) tariff hike 2) government guarantee 3)
proof of filing of tariff hike petition etc, which reduces the risk on incremental lending
done to SEBs. The management remains fairly conscious about the developments in
the power sector. Reformatory steps by government addressing the issues of the
power / infrastructure sector could boost growth going forward.
Loan growth remains healthy: Loan book grew at a healthy pace at 25% YoY and 5%
QoQ to INR950b. Segmental loan mix remained fairly stable with T&D segment
constituting ~49% of loan book while generation segment constituted ~45%. Despite
moderation in the pace of sanctions and disbursements, loan growth continues to
remain healthy. Based on borrower wise classification, exposure to state entities
stood at 82% of loan book. The share of private sector has increased further to 12%
from 11.2% in 2QFY12 and 9.1% a year ago. Incremental loans and borrowings for the
quarter stood at INR46b and INR54b respectively.
Reported margins contract 13bp QoQ to 4.34%: NII grew 18.5% YoY and 5.8% QoQ to
INR10.0b; in line with our estimates. Healthy asset growth could not translate into
similar kind of topline performance as reported net interest margin contracted by
13bp QoQ to 4.34%. The pressure on margins could be mainly attributed to the reversal
of interest income to the tune of ~INR220m on account of classification of one large
project as non-performing. As a result, the yield on loans remained largely flattish
QoQ at 11.44% v/s 11.42% in 2QFY12.
Foreign borrowings help to maintain a tight leash on cost of funds: RECL maintained
tight leash on cost of funds with incremental cost of borrowings remaining stable
QoQ at 8.82% despite a large chunk of the incremental borrowings (~79%) done through
bonds, which is commendable. Importantly, proportion of bank and FI borrowing
continued to decline to INR55b vs INR63b a quarter ago. Moreover, the share of foreign
currency borrowings has been steadily increasing which also has helped RECL to keep
its cost of funds under check.
Asset quality deteriorates due to a large power project classified as NPA: Asset quality
deteriorated with GNPAs nearly doubling to INR4.9b from INR2.7b in 2QFY12 on account
of one large gas based power project being classified as NPA. RECL's exposure to this
project stood at INR2.2b. Consequently, the company made provisions worth INR241m
during the quarter. RECL has not made any standard asset provisions and will take a
call on the same in the coming quarter. With the rising risk quotient for SEB loans and
sharply increasing private sector loans proportion, no standard asset provisioning
continuous to remain a concern.
Other highlights
Employee expenses more than doubled QoQ to INR680m due to a one time
provision of ~INR400m providing for arrears of baseline incentives (for 2009-10
and 2010-11) paid to its employees.
As at end of 3QFY12, REC's capital adequacy stood at 17.4% v/s 18.1% as on 2QFY12.
Valuation and view: With a strong sanctions pipeline, loan growth is likely to remain
healthy at 21% CAGR over FY11-13E. However, in current macroeconomic environment,
asset quality is a bigger concern as against fears of slowdown in growth. Rising SEB
losses are driving up the risk quotient, more so for REC given its higher exposure to
the T&D segment. However, government's continued thrust on power sector reforms,
recourse to SEB collections through an escrow mechanism and recent tariff hikes by
various SEBs provides some comfort.
We fine tune our earnings estimates and expect earnings CAGR of 16%, with average
RoA's of ~3% over FY12/13E. While we expect ROA to decline by ~25bp over FY11-FY13
owing to a compression in NIMs and building in some credit cost, ROE would continue
to remain strong at 21-22% as REC leverages its capital. The stock trades at 1.1x FY13E
BV. We maintain Buy with a target price of INR235 (1.4x FY13E BV).
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