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REC: NIMs continue to remain firm - Views on News from Equitymaster
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REC: NIMs continue to remain firm
Mar 13, 2014

Rural Electrification Corporation (REC) announced its results for the third quarter of the financial year 2013-14 (3QFY14). The institution grew its net interest income by 23% YoY and profits by 20% YoY during the quarter. For 9mFY14, the profits grew by 22% YoY.

Performance summary
  • Income from operations grows 23.6% YoY in 3QFY14 and by 27.4% in 9mFY14 on the back of a 20% increase in the loan book.
  • Net interest income grew at a quicker pace on lower interest costs, rising 23.2% YoY in 3QFY14.
  • Disbursements grew by 3% YoY, sanctions however declined by 8.7% YoY in 9mFY14.
  • Non-interest income grew by strong 50% YoY during the quarter, while increasing mere 0.3% during the first nine months.
  • NIMs rose to 4.9% at the end of 9mFY14 from 4.6% at the end of 9mFY13 on higher yields.
  • Bottom-line grew by 19.6% YoY in 3QFY14 on the back of higher NII and other income.
  • The net NPA for the company has come down to 0.25% in 3QFY14 as against 0.34% a year ago.

Financial Performance Snapshot
Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Income from operations 35,014 43,290 23.6% 97,387 124,102 27.4%
Interest expended 20,931 25,938 23.9% 59,362 74,151 24.9%
Net Interest Income† 14,084 17,352 23.2% 38,025 49,951 31.4%
Net interest margin**       4.6% 4.9%  
Other Income 508 762 50.0% 2,199 2,206 0.3%
Forex (gain)/loss
Operating expense 507 599 18.3% 1,547 1,677 8.4%
Provisions and contingencies 250 754 201.8% 250 1,646 558.2%
Profit before tax 13,835 16,760 21.1% 38,428 48,834 27.1%
Tax 3,568 4,484 25.6% 9,855 13,914 41.2%
Effective tax rate 25.8% 26.8%   25.6% 28.5%  
Profit after tax/ (loss) 10,267 12,277 19.6% 28,573 34,920 22.2%
Net profit margin (%) 29.3% 28.4%   29.3% 28.1%  
No. of shares (m)         987  
Book value per share (Rs)*         196.8  
P/BV (x)         1.04  
* (Book value as on 31st December 2013)
** Annualized

What has driven performance in 3QFY14?
  • REC reported good earnings performance for the third quarter ended FY14. The NII growth was reported at 23.2% YoY. The other income performance stood strong and grew by 50.0% YoY. The operating costs and provisioning stood on the higher side restricting the profitability growth for the quarter. Nonetheless the profits for the quarter grew by 19.6% YoY. For 9mFY14, the profitability growth was recorded at 22.2% YoY.

  • On the business front, while the sanctions have gone up during 3QFY14, 9mFY14 report 8.7% decline in sanctions. Sanctions during 3QFY14 were largely driven by T&D segment. The T&D segment's share rose to 94% during 3QFY14 from 55% during 3QFY13. While the share of generation segment reported a steep fall and it contributed merely 5% to the total sanctions in 3QFY14 as against 42% in 3QFY13. The disbursements on the contrary have de-grown during the quarter but improved moderately during 9mFY14 on YoY basis. The T&D segment continues to be the major driver for the disbursement growth. Overall, the loans recorded a decent 20.1% YoY growth during 9mFY14.

    Sanctions decline, disbursements report moderate growth...
    (Rs m) 9mFY13 9mFY14 Change
    Sanctions 612,040 558,940 -8.7%
    Disbursements 249,180 256,710 3.0%
    D/S ratio 40.7% 45.9%  
    Advances* 1,186,900 1,425,170 20.1%
    * excludes interest accrued and due

  • The borrowings profile for the company has been in a good stead with almost 60% of the borrowings coming from bonds and around 20% from bank borrowings. The cost of funds; however; have stood on the higher side. But thanks to the healthy yields, the company reported strong margins during the third quarter. The NIMs improved to 4.9% during 9mFY14 from 4.6% during 9mFY13.

    Steady borrowing profile
    (Rs m) 9mFY13 % of total 9mFY14 % of total Change
    Capital Gain Bonds 30,770 13% 34,430 12% 11.9%
    Institutional Bonds 133,370 58% 126,130 43% -5.4%
    Banks, FIs, CP, etc. 21,170 9% 61,810 21% 192.0%
    Foreign Currency 19,900 9% 19,930 7% 0.2%
    Tax free bonds 25,170 11% 49,410 17% 96.3%
    Total 230,380 100% 291,710 100% 26.6%
    * FIs = financial institutions

  • The operating costs for the company have gone up by 18.3% YoY during 3QFY14. For the 9-month period of FY14, the operating costs have gone up by 8.4% YoY. While on absolute basis the costs have gone up, the cost-income ratio for REC remains one of the lowest in the industry.

  • Defying macro challenges, REC continues to demonstrate improvement in asset quality each quarter. The gross NPAs for the company were reported at 0.34% as at the end of December quarter 2013 as against 0.41% a year ago. The net NPAs too were seen down to 0.25% in 3QFY14 as against 0.34% in 3QFY13. However, the provisions for the quarter shot up by 201.8% YoY restricting the profitability growth of the company. While the apprehensions with respect to the power sector issues continue to persist, few government initiatives such as bailing out ailing discoms and resolution of fuel supply issues have augured well for power financiers such as REC.
What to expect?
At the current price of Rs 204, the stock is valued at 0.8 times our estimated FY16 adjusted book value

REC continues to be one of the safer plays in Indian infrastructure financing. However, in line with the power sector, RECís operational performance has been well below our estimates. The Indian power sector is coping with severe pressures ranging from inadequate fuel supply to weak financial profiles of state power utilities. While investors can continue to HOLD on to the stock of REC, the upside in stocks related to power sector remains largely dependent on favorable regulations, adequate fuel supply and improved financials for SEBs, which could warrant a revision in valuations. However please ensure that no stock forms more than 3-5% of your portfolio.

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Feb 19, 2018 11:25 AM


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