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REC: Margins receive capital boost
May 20, 2010

REC declared its FY10 results. The institution grew its interest income and profits at 38% and 57% YoY respectively.

Performance summary
  • Income from operations grows 38% YoY in FY10, on the back of 30% YoY growth in advances. Disbursements grow by 23% YoY, approvals by 11% YoY in FY10.
  • Net interest margins (NIM) improve by 0.3% to 4% in FY10 due to lower funding costs.
  • Non-interest income grows by just 4% YoY due to lower loan related fees.
  • Bottomline grows by 57% YoY in FY10 backed by lower provisioning cost.
  • Declared dividend of Rs 6.5 per share for FY10, including the interim dividend (dividend yield 2.5%).


Standalone numbers...
Rs (m) 4QFY09 4QFY10 Change FY09 FY10 Change
Income from operations      13,370     17,959 34.3%       46,649       64,309 37.9%
Interest expended        8,552     10,685 24.9%       28,972       39,112 35.0%
Net Interest Income          4,818       7,274 51.0%       17,677       25,197 42.5%
Net interest margin       3.7% 4.0%  
Other Income        1,100          736 -33.1%         2,663         2,767 3.9%
Operating expense           206          392 90.3%         1,116         1,425 27.7%
Provisions and contingencies              24              -    -100.0%               24                 2 -91.7%
Profit before tax        5,688       7,618 33.9%       19,200       26,537 38.2%
Tax        1,807       2,007 11.1%         6,480         6,523 0.7%
Effective tax rate 31.8% 26.3%   33.8% 24.6%  
Profit after tax/ (loss)        3,881       5,611 44.6%       12,720       20,014 57.3%
Net profit margin (%) 29.0% 31.2%   27.3% 31.1%  
No. of shares (m)                859            988  
Book value per share (Rs)*                 112.2  
P/BV (x)                      2.4  
* (Book value as on 31st March 2010)

What has driven performance in FY10?
  • Backed by a reasonable pick-up in demand for funding power projects and banks’ reluctance to fund long term assets with their short term liabilities, REC saw its advances grow by 30% YoY in FY10. The growth in sanctions and disbursements was at 11% and 23% YoY respectively. While 53% of the sanctions were to generation projects, the disbursements were equally divided between generation (40%) and T&D projects (43%). 84% of the company’s loan book continues to be exposed to state governments. REC currently provides 16% of the 70% debt required to fund power projects. Given the opportunity, it expects to grow its loan book at an average annual rate of 25% over the next 3-5 years.

    Cautious growth...
    (Rs m) FY09 FY10 Change
    Sanctions   407,460   453,570 11.3%
    Disbursements   171,570   211,320 23.2%
    D/S ratio 42.1% 46.6%  
    Advances   506,530   659,790 30.3%

  • 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. This is because 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 that point in time. Hence there are very few downsides to REC's NIM even in a rising interest rate scenario. The margins are well in line with our estimates.

  • The share of non-interest income to REC’s total income increased from 30% in FY09 to 22% in FY10. The institution received Rs 580 m in the form of fees under Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY), REC currently receives a fee equal to 1% of the project cost from the government for administering the scheme.

  • The institution is currently adequately capitalised (after the recent FPO) with CAR of around 15% in FY10, in line with the RBI norms. REC had 0.3% gross NPA levels and provision coverage ratio of 90% at the end of FY10.

What to expect?
At the current price of Rs 265, the stock is valued at 1.7 times our estimated FY13 adjusted book value. With one of the highest capital adequacy ratios, high NIMs and one of the best asset qualities; we reiterate our positive view on the company with a long-term perspective. Even on a reasonably conservative estimate of only 60% to 70% of the planned investment in power sector fructifying by the end of the 12th 5-year Plan (2012-2017), we see REC sustaining reasonable growth over the longer term.

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