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REC: Sustaining momentum - Views on News from Equitymaster
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REC: Sustaining momentum
Jul 21, 2010

REC declared its 1QFY11 results. The institution grew its interest income and profits at 30% and 25% YoY respectively.

Performance summary
  • Income from operations grows 30% YoY in 1QFY11, on the back of 28% YoY growth in advances (including interest accrued). These include loans for power generation, transmission and distribution projects.
  • Disbursements grow by 28% YoY, approvals by 51% YoY in 1QFY11.
  • Net interest margins (NIM) improve by 0.7% to 4.4% in 1QFY11 due to lower funding costs.
  • Non-interest income falls by 13% YoY due to lower processing fees in 1QFY11.
  • Bottomline grows by 25% YoY in 1QFY11 backed by improvement in net interest margins.

Standalone numbers...
Rs (m) 1QFY10 1QFY11 Change
Income from operations 14,494 18,771 29.5%
Interest expended 8,735 11,012 26.1%
Net Interest Income 5,759 7,758 34.7%
Net interest margin      
Other Income 596 517 -13.2%
Operating expense 300 343 14.3%
Provisions and contingencies 1 - -100.0%
Profit before tax 6,053 7,933 31.1%
Tax 1,335 2,059 54.3%
Effective tax rate 22.1% 26.0%  
Profit after tax/ (loss) 4,718 5,874 24.5%
Net profit margin (%) 32.6% 31.3%  
No. of shares (m) 156 328  
Book value per share (Rs)*   355.9  
P/BV (x)   0.9  
* (Book value as on 30th June 2010)

What has driven performance in 1QFY11?
  • Due to a strong 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 28% YoY in 1QFY11. The growth in sanctions and disbursements was at 28% and 51% YoY respectively during the quarter. Sanctions were equally divided among generation and transmission & distribution (T&D) This was compared to a 74% and 22% split in 1QFY10. However, disbursements had a higher leaning towards generation with 70% going to the segment, compared to 55% previously. T&D projects got a 26% share. 85% 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.

    Dynamic growth...
    (Rs m) 1QFY10 1QFY11 Change
    Sanctions 151,370 228,820 51.2%
    Disbursements 36,180 46,440 28.4%
    D/S ratio 23.9% 20.3%  
    Advances 535,300 692,170 29.3%

  • 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 slightly ahead of our estimates.

  • The company is also planning to raise US$ 1 bn through external commercial borrowings (ECB) during the current FY11. It expects to raise US$ 400 m by the second week of August. This is likely to be a five-year loan at an interest rate of 6-month Libor plus 1.75%. The ECB fundraising target has gone up from US$ 400 m set earlier, as the company is looking to finance some solar and wind power projects. Moreover, the company is looking at financing a few big-ticket power projects being set up by private players. REC is also planning to raise about Rs 30 bn through infrastructure bonds. These would be issued in two tranches of about Rs 15 bn each in October and February 2011.

  • REC’s non-interest income fell by 13%. This was be due to lower fee income 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. It is the nodal agency appointed by the Government for this scheme.

  • REC had 0.03% gross NPA levels and provision coverage ratio of 90% at the end of 1QFY11.

What to expect?
At the current price of Rs 301, the stock is valued at 1.9 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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