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Rural Electrification Corp. (RECL)
Banks/Financial Institutions
Core performance in line. REC reported PAT of Rs7.7 bn, up 16% yoy and 6% above
estimates. Business traction was strong: 25% loan growth and almost stable NIM qoq.
Gross NPLs increased marginally to 0.5% to advances as an AP-based power plant
slipped into the NPL category. A change in provisioning policy on forex loans lifted PBT
by Rs866 mn; excluding this item, PBT was 1% below estimates. We revise estimate to
factor positive traction in margins though remain cautious on the asset quality
performance over the next few quarters. Retain BUY with target price of Rs230.
Higher disbursements and lower repayments boosted loan growth in 3QFY12
REC reported 25% yoy and 5% qoq loan growth. Loan approvals declined by 18% yoy to Rs88 bn
while disbursements increased by 6% yoy to Rs63 bn. The generation sector was the key driver
accounting for over 40% of incremental business. Quarterly repayment rate inched up to 1.9% in
3QFY12 as compared to 1.8% in 2QFY12 but much lower than 4.3% in 3QFY11. The competitive
environment has considerably eased in FY2012 YTD, thereby boosting growth for REC.
Spreads remain stable
REC reported margins of 4.4%—almost stable for the past three quarters but down from 4.7% in
3QFY11. Spreads increased by 10 bps qoq and are now at close to 3%. While weighted average
borrowings cost has increased by 20 bps qoq to 8.4% due to re-pricing of existing loans, the
incremental borrowings cost declined to 8.6% from 8.8%. Notably, the incremental borrowings
cost is now almost equal to the weighted average borrowings cost. Moderation in bulk borrowings
rates in the system will further pull down REC’s borrowings cost over the next few quarters.
NPL slippage in 3QFY12
REC’s gross NPLs increased to 0.5% from 0.3% qoq. A loan to AP-based power plant slipped into
the non-performing category during the quarter. The company made provision of Rs240 mn (10%
of total exposure of Rs2.4 bn). Notably, this is the second private project that slipped into NPL
category in FY2012E—in 1QFY12, a loan of Rs2.5 bn to an MP-based hydel project had slipped
into the NPL category.
Valuations inexpensive, REC remains a play on recovery in the sector
We expect REC to deliver 12% EPS CAGR between FY2011 and FY2014E and medium-term RoE
of about 20%. REC is currently trading at 5.9X PER and 1.2X PBR FY2013E. This works out of
1.45X FY2014E adjusted PBR, if we build in NPLs of 4%. This (adjustment) effectively implies that
50% of the private sector loan book (as of December 2011) is written off.
We are relatively more comfortable on the asset quality performance of state (and central)
sector loans (88% of loan book for REC as of December 2011) given the positive
developments at state electricity boards (SEB) over the past few months. While the recently
proposed tariff hikes may not, in itself, drive a turnaround at SEBs, a more disciplined
approach by SEBs and regulators will likely reduce their credit risks in the medium term.
However, we believe that stress in the private sector loan book will likely be reflected over
the next few quarters. We believe that early resolution of macro issues in the sector
(availability and supply of coal, likely renegotiation of power purchase agreements) will
affect the fortunes for these projects and hence drive stock performance of REC (and PFC).
Loan growth to moderate unless new proposals increase
We are modeling about 15% loan growth in FY2014E as compared to ~20% loan growth in
earlier years. We believe that disbursements towards pre-approved projects (projects that
have begun construction activity) will drive the business over the next few quarters. However,
subdued activity in new projects will hit loan growth from FY2014E unless the macro
environment does not improve.
In light of challenges in the sector, the power finance companies have adopted more
stringent disbursement pre-conditions for projects approved from 2011 (like firm fuel supply
agreement, power purchase agreement etc.). We believe that it will be challenging for
promoters to meet some of these conditions at the current juncture. REC (and PFC) will
continue/resume disbursements to SEBs that have raised tariff, publish financials and follow
norms laid in the joint committee of chief ministers.
Positive outlook on medium-term NIM
We believe that decline in bulk borrowings rates will augur well for NIM of REC over the
medium term. Lower competition from banks in lending to SEBs and (refinancing loans to
private power players) will likely improve the negotiating power of REC (and PFC) with its
borrowers. We are modeling 3.1% spread in FY2013E as compared to 3.3% in FY2011 and
3.2% in FY2012E. We, however, believe that REC’s spreads will likely moderate over the
years in light of current elevated levels (especially compared to PFC). We are hence modeling
2.8% spread in FY2014E.
Provisions will likely increase
In order to factor likely deterioration in asset quality, we are assuming NPL provisions at
0.15% of loan assets in FY2013E and FY2014E as compared to negligible provisions made in
the past. We would like to highlight that its is challenging to model the NPLs, credit losses
and restructured losses for PFC and REC given the large and lumpy exposures of PFC and
REC to generation projects. Our provision estimates for next two years take account of 4%
of the existing private sector book.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Rural Electrification Corp. (RECL)
Banks/Financial Institutions
Core performance in line. REC reported PAT of Rs7.7 bn, up 16% yoy and 6% above
estimates. Business traction was strong: 25% loan growth and almost stable NIM qoq.
Gross NPLs increased marginally to 0.5% to advances as an AP-based power plant
slipped into the NPL category. A change in provisioning policy on forex loans lifted PBT
by Rs866 mn; excluding this item, PBT was 1% below estimates. We revise estimate to
factor positive traction in margins though remain cautious on the asset quality
performance over the next few quarters. Retain BUY with target price of Rs230.
Higher disbursements and lower repayments boosted loan growth in 3QFY12
REC reported 25% yoy and 5% qoq loan growth. Loan approvals declined by 18% yoy to Rs88 bn
while disbursements increased by 6% yoy to Rs63 bn. The generation sector was the key driver
accounting for over 40% of incremental business. Quarterly repayment rate inched up to 1.9% in
3QFY12 as compared to 1.8% in 2QFY12 but much lower than 4.3% in 3QFY11. The competitive
environment has considerably eased in FY2012 YTD, thereby boosting growth for REC.
Spreads remain stable
REC reported margins of 4.4%—almost stable for the past three quarters but down from 4.7% in
3QFY11. Spreads increased by 10 bps qoq and are now at close to 3%. While weighted average
borrowings cost has increased by 20 bps qoq to 8.4% due to re-pricing of existing loans, the
incremental borrowings cost declined to 8.6% from 8.8%. Notably, the incremental borrowings
cost is now almost equal to the weighted average borrowings cost. Moderation in bulk borrowings
rates in the system will further pull down REC’s borrowings cost over the next few quarters.
NPL slippage in 3QFY12
REC’s gross NPLs increased to 0.5% from 0.3% qoq. A loan to AP-based power plant slipped into
the non-performing category during the quarter. The company made provision of Rs240 mn (10%
of total exposure of Rs2.4 bn). Notably, this is the second private project that slipped into NPL
category in FY2012E—in 1QFY12, a loan of Rs2.5 bn to an MP-based hydel project had slipped
into the NPL category.
Valuations inexpensive, REC remains a play on recovery in the sector
We expect REC to deliver 12% EPS CAGR between FY2011 and FY2014E and medium-term RoE
of about 20%. REC is currently trading at 5.9X PER and 1.2X PBR FY2013E. This works out of
1.45X FY2014E adjusted PBR, if we build in NPLs of 4%. This (adjustment) effectively implies that
50% of the private sector loan book (as of December 2011) is written off.
We are relatively more comfortable on the asset quality performance of state (and central)
sector loans (88% of loan book for REC as of December 2011) given the positive
developments at state electricity boards (SEB) over the past few months. While the recently
proposed tariff hikes may not, in itself, drive a turnaround at SEBs, a more disciplined
approach by SEBs and regulators will likely reduce their credit risks in the medium term.
However, we believe that stress in the private sector loan book will likely be reflected over
the next few quarters. We believe that early resolution of macro issues in the sector
(availability and supply of coal, likely renegotiation of power purchase agreements) will
affect the fortunes for these projects and hence drive stock performance of REC (and PFC).
Loan growth to moderate unless new proposals increase
We are modeling about 15% loan growth in FY2014E as compared to ~20% loan growth in
earlier years. We believe that disbursements towards pre-approved projects (projects that
have begun construction activity) will drive the business over the next few quarters. However,
subdued activity in new projects will hit loan growth from FY2014E unless the macro
environment does not improve.
In light of challenges in the sector, the power finance companies have adopted more
stringent disbursement pre-conditions for projects approved from 2011 (like firm fuel supply
agreement, power purchase agreement etc.). We believe that it will be challenging for
promoters to meet some of these conditions at the current juncture. REC (and PFC) will
continue/resume disbursements to SEBs that have raised tariff, publish financials and follow
norms laid in the joint committee of chief ministers.
Positive outlook on medium-term NIM
We believe that decline in bulk borrowings rates will augur well for NIM of REC over the
medium term. Lower competition from banks in lending to SEBs and (refinancing loans to
private power players) will likely improve the negotiating power of REC (and PFC) with its
borrowers. We are modeling 3.1% spread in FY2013E as compared to 3.3% in FY2011 and
3.2% in FY2012E. We, however, believe that REC’s spreads will likely moderate over the
years in light of current elevated levels (especially compared to PFC). We are hence modeling
2.8% spread in FY2014E.
Provisions will likely increase
In order to factor likely deterioration in asset quality, we are assuming NPL provisions at
0.15% of loan assets in FY2013E and FY2014E as compared to negligible provisions made in
the past. We would like to highlight that its is challenging to model the NPLs, credit losses
and restructured losses for PFC and REC given the large and lumpy exposures of PFC and
REC to generation projects. Our provision estimates for next two years take account of 4%
of the existing private sector book.
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