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REC: Profit growth slows

May 28, 2012

Rural Electrification Corporation (REC) declared its declared its FY12 (financial year 2012) results. The institution grew its net interest income by 19% YoY (year on year) and profits by 10% YoY.

Performance summary
  • Income from operations grows 29% YoY in 4QFY12 and by 27% YoY in FY12 on the back of a 24% increase in the loan book.
  • Net interest income (NII) grew at a slower pace, rising 19% YoY in FY12, with a similar performance seen during the quarter, on higher cost of funds.
  • Disbursements grow by 13.5% YoY, sanctions fall by 23.5% YoY in FY12, on account of lesser off take seen in the power sector.
  • Other income saw a decline in the fourth quarter, falling 46% YoY in 4QFY12 and 37% in FY12.
  • NIMs contract to 4.3% at the end of FY12 from 4.5% at the end of FY11.
  • Bottomline expands by a muted 9.6% YoY in FY12 and by 8.9% YoY in 4QFY12.
  • The company declared a final dividend of Rs 4 per equity share, taking the total dividend for the year to Rs 7.5 per share, implying a dividend yield of 4.4%.

Rs (m) 4QFY11 4QFY12 Change FY11 FY12 Change
Income from operations 21,581 27,866 29.1% 81,088 102,640 26.6%
Interest expended 13,043 17,659 35.4% 48,510 63,788 31.5%
Net Interest Income 8,538 10,207 19.5% 32,578 38,852 19.3%
Net interest margin**       4.5% 4.3%  
Other Income 1,483 805 -45.7% 3,865 2,451 -36.6%
Operating expense 561 767 36.6% 1,678 2,883 71.9%
Provisions and contingencies 1 -   2 491  
Profit before tax 9,459 10,245 8.3% 34,763 37,929 9.1%
Tax 2,456 2,618 6.6% 9,064 9,758 7.7%
Effective tax rate 26.0% 25.6%   26.1% 25.7%  
Profit after tax/ (loss) 7,003 7,627 8.9% 25,699 28,170 9.6%
Net profit margin (%) 32.4% 27.4%   31.7% 27.4%  
No. of shares (m)         987  
Book value per share (Rs)*         149.3  
P/BV (x)         1.1  
* (Book value as on 31st March 2012)
** Annualized

What has driven performance in FY12?
  • Despite rising interest rates, and a slowdown in infrastructure activity, especially in the power space, REC saw its loan book grow by 24% YoY in FY12. The growth in fresh sanctions however took a hit, falling 23.5% on a YoY basis. However, in the fourth quarter, REC managed to ramp these up significantly, with sanctions increasing 25% since December 2011. Disbursements had a higher leaning towards generation with 44% going to the segment, compared to 48% previously. T&D (Transmission and Distribution) projects got a 42% share. 84% of the company's loan book continues to be exposed to state governments.

    New sanctions see a decline...
    (Rs m) FY11 FY12 Change
    Sanctions 664,210 508,360 -23.5%
    Disbursements 245,190 278,200 13.5%
    D/S ratio 36.9% 54.7%  
    Advances* 817,250 1,014,260 24.1%
    * excludes interest accrued and due

  • REC has witnessed an improvement in its net interest margin (NIM) in recent years. 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 few downsides to REC's NIM even in a rising interest rate scenario. Also, its borrowings from banks stand at only 9% of its overall borrowing portfolio in FY12. Thus, it may not be as exposed to bank's rising base rates, compared to other NBFC peers. However on account of an overall increase in cost of funds, REC's margins decreased marginally to 4.3% from 4.5% at the end of FY11.

  • REC has been able to thwart the rising interest rate cycle by borrowing through ECBs (external commercial borrowings). Its current cost of borrowings is 7.9%. However, it has already offset some of this increase by raising lending rates. Its current annualized loan yield is around 11.2% giving the institution a comfortable spread of over 3%. However, the sharp rise in foreign currency borrowing exposure may lead to some pressures in terms of managing forex risk. REC targets to raise US$ 750 m via ECBs in 2012-13. This is part of the Rs 300 bn debt that it intends to raise in the new fiscal. The finance company is also awaiting final clearances from Government to raise US$1 bn through Foreign Currency Convertible Bonds (FCCBs).

    Borrowing Profile
    (Rs m) FY11 % of total FY12 % of total Change
    Capital Gain Bonds 113,160 16% 167,170 19% 47.7%
    Institutional Bonds 398,790 57% 545,850 61% 36.9%
    Banks, FIs, etc. 112,260 16% 79,860 9% -28.9%
    Foreign Currency 75,830 11% 106,800 12% 40.8%
    Total 700,040 100% 899,680 100% 28.5%
    * FIs = financial institutions

  • REC had 0.48% gross NPA levels at the end of FY12; this is an increase from 0.02% levels seen in FY12. The increase in NPA levels last fiscal was on account of non-performing assets of Konaseema Gas Power project and the Maheshwar Hydroelectric project, which took place earlier in FY12. No further deterioration was seen in 4QFY12. REC however does not expect a significant decrease in asset quality over the long term as power is a necessity. However in the short term some more stress can be expected.

What to expect?
At the current price of Rs 170, the stock is valued at 0.9 times our estimated FY14 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. This will help them meet their loan obligations. However fuel supply is another important concern, which will need to be met by either importing coal from overseas or by bringing in private sector coal miners. The penalty for non-achievement that Coal India needs to pay on its fuel supply agreements will also help improve coal availability.

Even in a high interest rate environment, REC is well equipped to manage NIMs and spreads, on account of its overseas borrowings through ECBs. It has been able to maintain its spreads at 3.3% even with RBI's excessive rate hikes. Irrespective, it has seen robust loan growth, of 24% for the last fiscal. For next fiscal it plans a disbursement of Rs 272 bn, which is slightly lower than the FY12 figure. Asset quality has deteriorated on account of the said problems in the power sector; however on a long term sustainable basis the institution does not see too much stress on this account. We reiterate our 'Buy' view on account of the reasonable valuations the stock is trading at currently as most of the pains have been priced in. Significant exposure to the state sector and issues in the power sector are key risks however.

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