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REC: NIMs continue to shine
Feb 12, 2013

Rural Electrification Corporation (REC) declared its results for the third quarter of the financial year 2012-13 (3QFY13). The institution grew its net interest income by 32% YoY and profits by 33% YoY during the quarter.

Performance summary
  • Income from operations grows 32% YoY in 3QFY13 and by 30% in 9mFY13 on the back of a 25% increase in the loan book.
  • Net interest income grew at a quicker pace on lower interest costs, rising 42% YoY in 3QFY13.
  • Disbursements grow by 39% YoY, sanctions also see a comeback growing by 50% YoY in 9mFY13.
  • Other income grows by 4% YoY during the quarter, while increasing 34% during the first nine months.
  • NIMs rise to 4.8% at the end of 9mFY13 from 4.4% at the end of 9mFY12 on higher yields.
  • Bottomline grows by 33% YoY in 3QFY13 on a higher NII, lower operating expenses and muted provisioning and by 39% in 9mFY13.
  • The company declared an interim dividend of Rs 6.75 per share.

Financial performance snapshot
Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Income from operations 26,501 35,014 32.1% 74,775 97,387 30.2%
Interest expended 16,449 20,711 25.9% 46,130 58,628 27.1%
Net Interest Income  10,052 14,303 42.3% 28,645 38,759 35.3%
Net interest margin**       4.4% 4.8%  
Other Income 490 508 3.6% 1,646 2,199 33.6%
Forex (gain)/loss (866) 220   462 734  
Operating expense 780 507 -35.0% 1,634 1,547 -5.4%
Provisions and contingencies 241 250 3.8% 491 250 -49.1%
Profit before tax 10,387 13,835 33.2% 27,704 38,428 38.7%
Tax 2,692 3,568 32.5% 7,147 9,855 37.9%
Effective tax rate 25.9% 25.8%   25.8% 25.6%  
Profit after tax/ (loss) 7,695 10,267 33.4% 20,558 28,573 39.0%
Net profit margin (%) 29.0% 29.3%   27.5% 29.3%  
No. of shares (m)         987  
Book value per share (Rs)*         170.4  
P/BV (x)         1.4  
* (Book value as on 31st December 2012)
** Annualized

What has driven performance in 9mFY13?
  • Despite elevated interest rates, and a slowdown in infrastructure activity, especially in the power space, REC saw its loan book grow by a steady 25% YoY in 9mFY13. Sanctions also saw a comeback, rising by 50% YoY in 9mFY13. Disbursement growth came in at 39% YoY. Disbursements had a higher leaning towards T&D (Transmission and Distribution) with 55% going to the segment, compared to 38% previously. Generation projects got a 33% share (49% previously). 83% of the company's loan book continues to be exposed to state governments.

    Fresh sanctions see a comeback...
    (Rs m) 9mFY12 9mFY13 Change
    Sanctions 407,700 612,040 50.1%
    Disbursements 179,440 249,180 38.9%
    D/S ratio 44.0% 40.7%  
    Advances* 949,580 1,186,900 25.0%

  • 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, 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. Now with policy rates seeing an easing, the institution should benefit as costs of funds reduce. REC saw its NIMs for the 9 month period improve to a stellar 4.8% compared to 4.4% previously.

  • REC's borrowings from banks stand at only 9% of its overall borrowing portfolio. The institution has also somewhat reduced its reliance on overseas borrowings and this now forms 4.6% of its loan portfolio in 9mFY13 compared to 6.3% earlier.

  • REC had 0.41% gross NPA levels at the end of 9mFY13; this is an improvement from 0.52% levels seen in 9mFY12. The institution has not seen an increase in slippages during the quarter. It does not believe that it will see a significant increase in NPAs till the end of this year; however we have been more conservative in our estimates. The power sector prospects have improvement somewhat with the government announcing a bailout package for discoms and there being more traction on fuel supply issues.

  • REC announced an interim dividend of Rs 6.75, implying a dividend yield of 2.8%.

What to expect?
At the current price of Rs 241, the stock is valued at 1.1 times our estimated FY15 adjusted book value. As per the management, the company will try and maintain its asset quality as the Ministry of Power is building up pressure on various state governments in order to increase state electricity boards (SEBs) tariffs. A lot of states have already gone ahead with tariff hikes. Plus the Financial Restructuring Plan has tabled by the government for troubled discoms. This bailout plan by the banks and state governments will help them meet their loan obligations. Even in a high interest rate environment, REC is well equipped to manage NIMs and spreads, on account of its overseas borrowings and through low cost bonds. The financer has also already increased its lending rates in order to offset higher interest costs. Now with funding costs coming down it will be able to benefit from the same. Sectoral risks still remain with regards to coal availability for power projects, slowdown in infrastructure growth, and slow investment cycle. However, we reiterate our Buy view on the stock on account of the reasonable valuations the stock is trading at currently and huge scope for growth within the sector.

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