Rural Electrification Corporation -Increasing TP on FY13F PAT increase of 17% FRP improves the outlook for the biggest Discom lender:: Nomura Research

Action: Reiterate Buy; TP increased to INR255
We believe that the recent financial restructuring plan (FRP) and the spate
of tariff hikes over the past few months have strongly reduced the
overhang on REC's SEB exposure (82% of its Q1FY13F loan book). We
had earlier factored in a restructuring of 10% of REC's loans to stressed
Discoms, which we don’t see necessary any longer, although we have
factored in a marginal NIM impact from extending shorter-term transition
loans to some of these Discoms over the next few years. Our earnings
estimates for FY13F and FY14F rise by 17% and 7%, respectively. We
expect a loan book growth of 18.4% and 18.1% for FY13F and FY14F,
respectively.

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We expect the robust spreads to sustain the superior RoEs
REC's spreads have improved by 35bps over the past six months, helped
by asset repricing, while NIMs have improved to 4.5% for Q1FY13. We
expect NIMs to stay in the 4.35-4.4% range over FY14F despite factoring in
marginally lower yields on higher short term loans. We also factor in INR4bn
of slippage in FY13F and incremental provisions on existing NPLs.
Catalyst: Adoption of FRP by SEBs, tariff hike orders in UP and other
states and developments on the coal linkage front
Valuation
REC currently trades at 1.2x our avg FY13-14F ABV estimate and 5.7x
our avg FY13-14F EPS estimate. At our new TP of INR255, REC would
trade at 1.5x our avg FY13-14F ABV estimate of INR172.4 and 6.9x EPS
estimate of INR37.1, for FY13F ROA of 3.1% and ROE of 23%.