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Tightrope walk
For 1QFY12, REC reported net profit of Rs6.6bn, up 13% YoY, inline with
our estimates. Loan growth was healthy at 24% and the trend in fresh
sanctions and disbursals indicates towards a healthy momentum as yet.
Asset quality disappointed with one private sector hydro-project slipping
into NPLs; we continue to build pressure in the private sector exposures.
We expect loan growth to moderate to 17% Cagr over FY11-14 and
earnings growth will be slower at 12% Cagr due to pressure on spreads
and higher provisioning. Maintain U-PF.
Stable lending trends, but spreads contract
During 1Q, REC’s loan growth was healthy at 24% YoY and the trend from
sanctions and disbursals indicates towards a healthy momentum until now.
Management highlighted that projects where construction has commenced
are largely moving as per targets, but new project conception has slowed.
While loans to private sector are growing faster (102% YoY), government
projects (89% of loans) also witnessed a healthy 19% growth. Fresh
sanctions were driven by the power generation segment. Spreads contracted
by 10bps QoQ / 25bps YoY to 3.1% due to a combination of rise in cost of
borrowings and reversal of income on the NPA.
Asset quality pressure in private sector
During 1QFY12 REC reported NPA in a private sector hydro-power project that
resulted in gross NPA rising from 0.02% of loans to 0.31%. We believe that
some projects in the private sector could slip into NPA and also increase the
provisioning pressures. We retain our estimate of 0.8-1.5% gross NPA ratio
over FY12-14, largely due to slippage in private sector that constitute 11% of
loans. We do not see NPA risk in government sponsored projects. REC also
highlighted that Tamil Nadu government is likely to support the SEB’s fund
raising plans by offering guarantee on Rs90-100bn of bonds.
Maintain U-PF
We expect loan growth to moderate from current levels to 17% Cagr over
FY11-14 due to slowdown in fresh investment, shortage of fuel supply and
higher competition in T&D lending space (50% of loans). Pressure on spreads
and rise in loan-loss provisioning will put pressure on core earnings growthwe
expect earnings growth of 12% Cagr. Headwinds on growth, profitability
and asset quality will weigh on near-term rerating potential of the stock and
we lower our target price to Rs200 based on 1.3x FY13CL adjusted book and
retain our U-PF recommendation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tightrope walk
For 1QFY12, REC reported net profit of Rs6.6bn, up 13% YoY, inline with
our estimates. Loan growth was healthy at 24% and the trend in fresh
sanctions and disbursals indicates towards a healthy momentum as yet.
Asset quality disappointed with one private sector hydro-project slipping
into NPLs; we continue to build pressure in the private sector exposures.
We expect loan growth to moderate to 17% Cagr over FY11-14 and
earnings growth will be slower at 12% Cagr due to pressure on spreads
and higher provisioning. Maintain U-PF.
Stable lending trends, but spreads contract
During 1Q, REC’s loan growth was healthy at 24% YoY and the trend from
sanctions and disbursals indicates towards a healthy momentum until now.
Management highlighted that projects where construction has commenced
are largely moving as per targets, but new project conception has slowed.
While loans to private sector are growing faster (102% YoY), government
projects (89% of loans) also witnessed a healthy 19% growth. Fresh
sanctions were driven by the power generation segment. Spreads contracted
by 10bps QoQ / 25bps YoY to 3.1% due to a combination of rise in cost of
borrowings and reversal of income on the NPA.
Asset quality pressure in private sector
During 1QFY12 REC reported NPA in a private sector hydro-power project that
resulted in gross NPA rising from 0.02% of loans to 0.31%. We believe that
some projects in the private sector could slip into NPA and also increase the
provisioning pressures. We retain our estimate of 0.8-1.5% gross NPA ratio
over FY12-14, largely due to slippage in private sector that constitute 11% of
loans. We do not see NPA risk in government sponsored projects. REC also
highlighted that Tamil Nadu government is likely to support the SEB’s fund
raising plans by offering guarantee on Rs90-100bn of bonds.
Maintain U-PF
We expect loan growth to moderate from current levels to 17% Cagr over
FY11-14 due to slowdown in fresh investment, shortage of fuel supply and
higher competition in T&D lending space (50% of loans). Pressure on spreads
and rise in loan-loss provisioning will put pressure on core earnings growthwe
expect earnings growth of 12% Cagr. Headwinds on growth, profitability
and asset quality will weigh on near-term rerating potential of the stock and
we lower our target price to Rs200 based on 1.3x FY13CL adjusted book and
retain our U-PF recommendation.
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