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REC: Healthy bottomline growth - Views on News from Equitymaster
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REC: Healthy bottomline growth
Feb 10, 2011

Rural Electrification Corporation (REC) declared its 3QFY11 results. The institution grew its net interest income by 36% YoY and profits by 40% YoY.

Performance summary
  • Income from operations grows 26% YoY in 3QFY11 and by 28% in 9mFY11 on the back of a 21% increase in the loan book.
  • Net interest income however grew at a sharper click, rising 36% YoY in 3QFY11.
  • Disbursements grow by 7% YoY, sanctions by 4% YoY in 9mFY11.
  • Other income saw a huge spike in the quarter, rising 74% YoY.
  • NIMs improve to 4.5% at the end of 9mFY11 from 4.2% at the end of 9mFY10.
  • Bottomline expands by 40% YoY in 3QFY11 and by 30% YoY in 9mFY11 backed by a healthy growth in net interest income.
  • The company declared an interim dividend of Rs 3.5 per equity share.

Standalone numbers...
Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Income from operations 16,532 20,860 26.2% 46,350 59,507 28.4%
Interest expended 10,279 12,380 20.4% 28,427 35,468 24.8%
Net Interest Income 6,254 8,480 35.6% 17,923 24,040 34.1%
Net interest margin**       4.2% 4.5%  
Other Income 530 921 73.8% 2,030 2,382 17.3%
Operating expense 338 386 14.2% 989 1,114 12.6%
Provisions and contingencies - -   2 1 -40.9%
Profit before tax 6,445 9,015 39.9% 18,963 25,307 33.5%
Tax 1,705 2,374 39.3% 4,560 6,610 44.9%
Effective tax rate 26.4% 26.3%   24.0% 26.1%  
Profit after tax/ (loss) 4,741 6,641 40.1% 14,403 18,697 29.8%
Net profit margin (%) 28.7% 31.8%   31.1% 31.4%  
No. of shares (m)     1,148 1,148  
Book value per share (Rs)*         127.1  
P/BV (x)         1.9  
* (Book value as on 31st December 2010)    ** Annualized

What has driven performance in 3QFY11?
  • Due to increased demand for funding power projects and banks' reluctance to fund long term assets with their short term liabilities, REC saw its loan book grow by 21% YoY in 9mFY11. The growth in sanctions and disbursements was however muted at single digits. The growth came in at 4% and 7% YoY respectively during the first nine months of FY11. Disbursements had a higher leaning towards generation with 51% going to the segment, compared to 38% previously. T&D projects got a 35% share. 86% of the company's loan book continues to be exposed to state governments.

    Cautious growth...
    (Rs m) 9mFY10 9mFY11 Change
    Sanctions 420,640 438,610 4.3%
    Disbursements 151,410 161,990 7.0%
    D/S ratio 36.0% 36.9%  
    Advances* 627,910 757,440 20.6%

  • REC has witnessed an improvement in its net interest margin (NIM) in recent years. Besides lower cost of funds the fact that it derives market linked yields for funding transmission and distribution schemes (capped at 5% until FY07), also provides an upside to its NIM. Further, a rise in interest rates will not hurt REC as the institution's lending rate is not locked at the time of sanctioning the loan. The sanction runs for 3 to 4 years before it gets fully disbursed. Hence the rate of interest is charged on the basis of date of disbursement which takes care of the adjusted cost of borrowing at the particular point in time. Hence there are very few downsides to REC's NIM even in a rising interest rate scenario. In keeping with this, REC's margins improved to 4.5% from 4.2% at the end of 9mFY10.

  • REC has been able to thwart the rising interest rate cycle by borrowing through ECBs. Its current cost of borrowings is 7.8% which may see a slight increase. However, it plans to offset this increase by raising lending rates by 0.5%. Its current annualized loan yield is in excess of 11% giving the institution a comfortable spread of over 3%.

  • The company received the status of an infrastructure financing company (IFC) in 2QFY11. With the new status REC can raise funds through tax free infrastructure bonds and additional borrowings through ECBs. After issues by <>IDFC and L&T Finance, REC has also come to the market with tax-free infra bonds. Investments in such bonds provide investors a tax exemption limit of Rs 20,000 under section 80CCF, over and above the Rs 100,000 available under section 80C. REC will have to incur an annual interest outlay of between 8-8.1% to the bondholders. The company plans to raise Rs 500 m through the same with a green shoe option to raise additional funds if oversubscribed.

  • REC raised US$ 470 m earlier this fiscal through overseas borrowings. In January 2011, the company raised a further US$ 500 m at a fixed coupon of 4.25%. With its IFC status, it can tap the ECB market though an automatic approval. It is also conducting a private placement of 10 year corporate bonds. However, the sharp rise in foreign currency borrowing exposure may lead to some pressures in terms of managing forex risk. As of now its un-hedged forex position amounts to US$ 770 m, which it plans to hedge at an appropriate time.

    Borrowing Profile
    (Rs m) 9mFY10 % of total 9mFY11 % of total Change
    Capital Gain Bonds 116,490 21% 105,410 17% -9.5%
    Institutional Bonds 288,030 52% 369,970 59% 28.4%
    Banks, FIs, etc. 102,600 19% 110,350 17% 7.6%
    Foreign Currency 18,660 3% 44,020 7% 135.9%
    Commercial Paper 25,750 5% 2,500 0% -90.3%
    Total 551,530 100% 632,250 100% 14.6%
    * FIs = financial institutions

  • REC had 0.03% gross NPA levels and provision coverage ratio of 90% at the end of 1HFY11, maintaining its strong asset quality. Being a government owned financing entity; it is also not subject to the 0.25% standard asset provisioning which the other NBFCs were subject to. At the end of 9mFY11 its capital adequacy ratio stood at a respectable 20.2% against its mandatory limit of 15%, giving it enough headroom for growth.

What to expect?
At the current price of Rs 237.2, the stock is valued at 1.4 times our estimated FY13 adjusted book value. As per the management, the company will continue to maintain its superior asset quality as it has been getting its payments on time from the State Electricity Boards. It will continue to see loan growth, as most banks have reached their limit for infra financing. The company has also mobilized large funds, over a long term period to be able to cater to the demand for financing generation and T&D projects. The company recently completed a 0.25% rate hike, and is planning a futher 0.5% rate hike along with PFC to be able to offset any increase in borrowing costs. We had last recommended a sell on the stock in December due to valuation concerns. The stock having corrected significantly since then offers reasonable long term upsides to investors at these levels.

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Feb 23, 2018 (Close)


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