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REC: All round performance - Views on News from Equitymaster

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REC: All round performance

Jun 25, 2013

Rural Electrification Corporation (REC) declared its results for the fourth quarter of the financial year 2012-13 (4QFY13). The institution grew its net interest income by 38% YoY and profits by 26% YoY during the quarter.

Performance summary
  • Income from operations grew by 28% YoY in 4QFY13 and by 30% in FY13 on the back of a 26% increase in the loan book.
  • Net interest income recorded robust 38% YoY growth primarily due to healthy interest spreads.
  • Disbursements grew by thumping 41% YoY, sanctions recorded as high as 56% YoY growth in FY13.
  • Non-interest income grew by modest 9% YoY during the quarter, while increased 26% during the full year FY13..
  • NIMs rise to 4.7% at the end of FY13 from 4.3% at the end of FY12 on higher yields.
  • Bottomline grows by 26% YoY in 4QFY13 on a higher NII and lower operating expenses FY13.
  • The company declared an interim dividend of Rs 6.75 per share during last quarter of FY13.

Rs (m) 4QFY12 4QFY13 Change FY12 FY13 Change
Income from operations 27,866 35,522 27.5% 102,640 132,910 29.5%
Interest expended 17,659 21,435 21.4% 63,788 80,063 25.5%
Net Interest Income 10,207 14,088 38.0% 38,852 52,847 36.0%
Net interest margin**       4.3% 4.7%  
Other Income 805 878 9.1% 2,451 3,074 25.5%
Forex (gain)/loss 64 41   526 775  
Operating expense 723 656 -9.3% 2,358 3,260 38.3%
Provisions and contingencies - 1,057   491 250 -49.1%
Profit before tax 10,224 13,212 29.2% 37,929 51,637 36.1%
Tax 2,612 3,601 37.9% 9,758 13,463 38.0%
Effective tax rate 25.5% 27.3%   25.7% 26.1%  
Profit after tax/ (loss) 7,613 9,611 26.2% 28,170 38,173 35.5%
Net profit margin (%) 27.3% 27.1%   27.4% 28.7%  
No. of shares (m)         987  
Book value per share (Rs)*         176.8  
* (Book value as on 31st March 2013)
** Annualized

What has driven performance in FY13?
  • REC's robust profitability during FY13 came largely on the back of strong loan book expansion, healthy spreads and lower provisions. Net interest income (NII) stood strong with yields improving and costs in control. Consequently, the net interest margins (NIMs) for the full year improved to 4.7% from 4.3% a year ago.

  • The company witnessed healthy 26% YoY growth in advances during FY13 on the back of whopping 56% YoY growth in sanctions, followed by 41% YoY growth in disbursements. The contribution from T&D (Transmission and Distribution) segment to total sanctions improved substantially to 60% from 45% a year ago. Whereas, the share of generation segment came down to 35% in FY13 from 46% in FY12. On similar lines, T&D formed larger share of disbursements at 57% and generation segment contributed 32% to total disbursements. Notably, the loan book for REC flourished despite the lackluster power sector and its chronic issues.

    Sanctions record strong growth...
    (Rs m) FY12 FY13 Change
    Sanctions 508,360 795,280 56.4%
    Disbursements 278,200 392,750 41.2%
    D/S ratio 54.7% 49.4%  
    Advances* 1,013,620 1,272,660 25.6%
    * excludes interest accrued and due

  • The borrowing profile of REC stands in good stead with 59% of resources raised through bonds. The dependence on bank borrowings stands lower at 6% and hence the company would remain least affected with fluctuations in interest rates.

  • FY13 proved a healthy year for REC in terms of asset quality. The gross NPAs moved down from 0.5% in FY12 to 0.4% in FY13 while Net NPAs were seen at 0.3% (FY13) down from 0.4% a year ago. The institution has not observed any increase in slippages; however the provisions have stood higher for FY13. 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.

  • REC announced an interim dividend of Rs 6.75 and a final dividend of Rs 1.5 per share for FY13.

What we expect?
At the current price of Rs 220, the stock is valued at 1.2 times FY13 reported 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. The recent government initiatives and the management's ability to deliver should bode well for REC. The resilient balance sheet, headroom in capital adequacy ratio, robust resource pipeline and healthy returns to shareholders make the stock a relatively less risky bet on the power sector. Therefore, we reiterate our BUY view on REC.

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