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We initiate coverage on Rural Electrification Corporation (REC) with a ADD rating
and a target price of Rs217/share (1.3x FY13E ABV). We believe valuations at 1.2x
FY13E adjusted book value and 5.7x FY13E EPS leave little upside, even as
concerns about the utilities space are being addressed through coordinated
efforts by the power ministry, CERC, state regulators and the RBI. However, we
build in slightly higher loan loss provisions for FY12-FY14E, and remain watchful
of its exposure to private sector. Despite this, 18% CAGR in loan growth and
stable spreads will ensure RoEs at 21% over FY12-14E. Prolonged delay in the
SEB reform process and private power projects turning unviable remain the key
risks to our call.
Reforms to ensure revival in disbursements. While lending to SEBs has slowed
down over past six months, sanction pipeline remains strong at ~Rs1300bn as of
Dec 2011 and will translate to strong disbursement growth once the reform process
accelerates. Further, REC has been diversifying its loan book with higher
disbursements to gencos which will aid future growth. We estimate a pick-up in
disbursements to drive an overall loan book growth of 18% CAGR over FY12-14E.
Cost advantage to ensure healthy spreads. A well diversified liability profile has
helped REC control its borrowing costs and maintain its spread at +3% over FY09-
9MFY12. Capital gains exempt bonds and ECBs, the major sources of low cost
borrowings, constitute 16% and 12% of total borrowings as of Q3FY12. Going
ahead, their proportion is likely to remain stable while declining interest rate
environment will lower borrowing costs. Spreads would remain stable at 3.3% over
FY12-14E.
Partial restructuring of SEBs possible; pressures likely from private sector.
REC has higher exposure to the distribution arms of SEBs and stressed SEBs
could very well see some restructuring. As such, we build in yield compression of
55bps over FY12-14E to account for possible interest rate hair-cut. However, larger
risk stems from its exposure to private sector.
Valuation methodology and key risks
We initiate coverage on REC with an ADD rating and a target multiple of 1.3x FY13E
ABV, which translates into a target price of Rs217/share. Slowdown in the SEB reform
process and inability on the part of private players to complete their on-going power
plants remain the key risks of our call.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We initiate coverage on Rural Electrification Corporation (REC) with a ADD rating
and a target price of Rs217/share (1.3x FY13E ABV). We believe valuations at 1.2x
FY13E adjusted book value and 5.7x FY13E EPS leave little upside, even as
concerns about the utilities space are being addressed through coordinated
efforts by the power ministry, CERC, state regulators and the RBI. However, we
build in slightly higher loan loss provisions for FY12-FY14E, and remain watchful
of its exposure to private sector. Despite this, 18% CAGR in loan growth and
stable spreads will ensure RoEs at 21% over FY12-14E. Prolonged delay in the
SEB reform process and private power projects turning unviable remain the key
risks to our call.
Reforms to ensure revival in disbursements. While lending to SEBs has slowed
down over past six months, sanction pipeline remains strong at ~Rs1300bn as of
Dec 2011 and will translate to strong disbursement growth once the reform process
accelerates. Further, REC has been diversifying its loan book with higher
disbursements to gencos which will aid future growth. We estimate a pick-up in
disbursements to drive an overall loan book growth of 18% CAGR over FY12-14E.
Cost advantage to ensure healthy spreads. A well diversified liability profile has
helped REC control its borrowing costs and maintain its spread at +3% over FY09-
9MFY12. Capital gains exempt bonds and ECBs, the major sources of low cost
borrowings, constitute 16% and 12% of total borrowings as of Q3FY12. Going
ahead, their proportion is likely to remain stable while declining interest rate
environment will lower borrowing costs. Spreads would remain stable at 3.3% over
FY12-14E.
Partial restructuring of SEBs possible; pressures likely from private sector.
REC has higher exposure to the distribution arms of SEBs and stressed SEBs
could very well see some restructuring. As such, we build in yield compression of
55bps over FY12-14E to account for possible interest rate hair-cut. However, larger
risk stems from its exposure to private sector.
Valuation methodology and key risks
We initiate coverage on REC with an ADD rating and a target multiple of 1.3x FY13E
ABV, which translates into a target price of Rs217/share. Slowdown in the SEB reform
process and inability on the part of private players to complete their on-going power
plants remain the key risks of our call.
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