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REC: Business growth, a drag - Views on News from Equitymaster
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REC: Business growth, a drag
Jun 5, 2014

Rural Electrification Corporation (REC) declared its results for the fourth quarter (4QFY14) and the financial year FY14. The institution grew its net interest income by 23% YoY and profits by 24% YoY during the quarter. For the full year, the profits grew by 23% YoY. Here are the details.

Performance summary
  • Income from operations grew by compelling 22.6% YoY in 4QFY14 and by 25.7% in FY14 on the back of a 16.7% increase in the loan book.
  • Net interest income recorded robust 23.1% YoY during 4QFY14 and 28% YoY during full year; primarily due to healthy interest spreads.
  • Disbursements decline by 9.5% YoY, sanctions too reported a de-growth of 11.1% YoY FY14.
  • Non-interest income grew by whopping 214.9% YoY during the quarter, while increased 67.7% during the full year FY14.
  • NIMs rise to 4.9% at the end of FY14 from 4.6% in FY13 on the back of higher loan yields.
  • Bottom-line grows by 24.1% YoY in 4QFY14 on a higher NII and lower operating expenses during FY14. However, higher provisions further restricted the profitability growth.
  • The company declared final dividend of Rs 9.5 per share for FY14 (dividend yield 2.9%).


Standalone Financial Snaspshot
Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Income from operations 36,250 44,425 22.6% 135,374 170,180 25.7%
Interest expended 21,476 26,234 22.2% 80,838  100,385 24.2%
Net Interest Income  14,774 18,192 23.1% 54,536 69,795 28.0%
Net interest margin**       4.6% 4.9%  
Other Income 151  475 214.9% 613 1,028 67.7%
Forex (gain)/loss            
Operating expense  656 715 9.0% 2,203 2,392 8.6%
Provisions and contingencies 1,057  1,475 39.5% 1,307 3,120 138.8%
Profit before tax 13,212 16,477 24.7% 51,640 65,311 26.5%
Tax 3,609  4,560 26.4% 13,463 18,474 37.2%
Effective tax rate 27.3% 27.7%   26.1% 28.3%  
Profit after tax/ (loss) 9,603 11,917 24.1% 38,176 46,837 22.7%
Net profit margin (%) 26.5% 26.8%   28.2% 27.5%  
No. of shares (m)       987  
Book value per share (Rs)*         209.3  
P/BV (x)          1.6  
* (Book value as on 31st march 2014)
** Annualized

What has driven performance in FY14?
  • Healthy spreads and strong non-interest income boosted the profitability for the quarter ended March 2014 and the full year. But for higher provisions, the profits for the company could have stood still higher. The company positively surprised us with higher income growth and hence the profits for full year exceeded 5% than our estimates. However, both sanctions and disbursements have disappointed during the year reporting de-growth.

  • The credit off-take of REC is reflective of the chronic power sector issues that continue to prevail. Despite putting up a decent show on loan growth (16.7% YoY), the sanctions and disbursements for REC were down by 11.1% YoY and 9.5% YoY respectively. The T&D segment continues to drive the sanctions growth contributing 56% during FY14. However, on YoY basis, the T&D share has come down, while the contribution from generation segment (41%) has gone up. T&D segment continues to boost disbursements as well with improved share of 59% to the total. Generation segment contributed 37% to the total disbursements. Private sector loans have grown by 21.5% YoY during FY14 which is a good sign.

    Sanctions/ Disbursements disappoint...
    (Rs m) FY13 FY14 Change
    Sanctions 795,280 707,400 -11.1%
    Disbursements 392,750 355,460 -9.5%
    D/S ratio 49.4% 50.2%  
    Advances* 1,272,660 1,485,040 16.7%
    * excludes interest accrued and due

  • Margins for the full year have observed healthy uptick as they moved up from 4.6% in FY13 to 4.9% in FY14. The loan yields that improved 56 bps YoY to 12.2% drove the margins for the year. Further re-pricing of assets should help margins sustenance going forward.

  • The borrowing profile of REC stands in good stead during FY14. With 60% of resources raised through bonds, the dependence on bank borrowings continues to fall and stands at 3%. Hence, the company would remain least affected with fluctuations in interest rates.

    Borrowing Profile
    (Rs m) FY13 % of total FY14 % of total Change
    Capital Gain Bonds 212,110 20% 275,170 22% 29.7%
    Institutional Bonds 640,380 59% 752,900 60% 17.6%
    Banks, FIs, etc. 63,240 6% 32,720 3% -48.3%
    Foreign Currency  152,380 14% 176,210 14% 15.6%
    Commercial Paper 9,800 1% 25,400 2% 159.2%
    Total 1,077,910 100% 1,262,400 100% 17.1%
    * FIs = financial institutions

  • TREC continues to demonstrate improvements in asset quality each quarter. The gross NPAs moved down from 0.4% in FY13 to 0.3% in FY14 while Net NPAs were seen at 0.2% (FY14) down from 0.3% a year ago. This is one of the lowest in the industry. The institution, however, has reported higher provisions for FY14. While the apprehensions with respect to the power sector issues continue to persist, hopes of revival have been raised with the stable government in power. This will augur well for power financiers such as REC. While the worst is not yet behind for the power sector, we continue to maintain conservative stance and hence estimate higher NPAs for next two years for REC.

  • The company has declared the final dividend of Rs 9.5 per share for FY14.
What to expect?
At the current price of Rs 328, the stock is valued at 1.2 times our estimated FY16 adjusted book value.

While lot of anxiety prevails pertaining to power sector and the pain there from, REC has demonstrated growth with quality over the years. The Indian power sector is coping with severe pressures whether its supply issues or clearance issues or weak financial profiles of state power utilities, the going has been quite tough. But with the hope of expeditious reforms and favorable regulations from the new government, the company is expected to perform better on the business and earnings front. Hence, the investors can continue to HOLD the stock of REC.

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