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REC: All-round performance - Views on News from Equitymaster
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REC: All-round performance
Aug 12, 2013

Rural Electrification Corporation (REC) declared its results for the first quarter of the financial year 2013-14 (1QFY14). The institution grew its net interest income by whopping 43% YoY and profits by healthy 32% YoY during the quarter.

Performance summary
  • Net Interest Income from grows by compelling 43.3% YoY in 1QFY14 on the back of healthy 24.6% increase in the loan book.
  • Disbursements grow by robust 20.8% YoY, sanctions recorded a lower 8.5% YoY growth in 1QFY14.
  • Non-interest income disappoints with decline of 8.9% YoY during the quarter,
  • NIMs rise to 4.96% in 1QFY14 from 4.3% in 1QFY13 on higher yields.
  • Bottomline grows by robust 31.6% YoY in 1QFY14 on a higher NII growth

Rs (m) 1QFY13 1QFY14 Change
Income from operations 29,968 39,141 30.6%
Interest expended 18,314 22,439 22.5%
Net Interest Income 11,654 16,702 43.3%
Net interest margin** 4.3% 5.0%  
Other Income 959 873 -8.9%
Forex (gain)/loss 374 581  
Operating expense 456 892 95.8%
Provisions andcontingencies - 223  
Profit before tax 11,784 15,880 34.8%
Tax 3,016 4,343 44.0%
Effective tax rate 25.6% 27.3%  
Profit after tax/ (loss) 8,767 11,537 31.6%
Net profit margin (%) 29.3% 29.5%  
No. of shares (m)   987  
Book value per share (Rs)*   183.1  
P/BV (x)   0.8  
* (Book value as on 30th June 2013)
** Annualized

What has driven performance in 1QFY14?
  • The profitability for the first quarter of the new financial year was largely driven by the robust top-line growth for REC. the Net Interest Income was recorded at healthy 43.3% during the quarter driven by strong disbursements growth of 20.8% YoY. The net interest margins too reported a strong number and were seen at 5% levels for the first quarter on account of improved yields. Consequently, profits were recorded at thumping 31.6% YoY growth during the quarter.

  • While the disbursements for REC grew at healthy pace for the first quarter at 20.8% YoY growth, the sanctions grew by modest 8.5% YoY. While T&D or Transmission and Distribution segment contributed 32% to the total sanctions, the contribution to disbursements were seen at 52% during the quarter. Overall, the company recorded healthy 24.6% YoY growth in loan assets during the quarter. Notably, the loan book for REC flourished despite the lackluster power sector growth and its chronic issues.

    Loan assets record healthy growth...
    (Rs m) 1QFY13 1QFY14 Change
    Sanctions 217,890 236,470 8.5%
    Disbursements 68,640 82,920 20.8%
    D/S ratio 31.5% 35.1%  
    Advances* 1066960 1,329,150 24.6%
    * excludes interest accrued and due

  • The borrowing profile for REC continues to remain in good stead with 62% borrowings coming through bonds and mere 4% from bank borrowings. Hence the company would remain least affected with fluctuations in interest rates.

  • The operating costs for the company stood exceptionally high during the first quarter. The company needs to be cognizant about the rising operating expenses going forward.

  • REC continues to maintain the quality of its asset book with improvement every quarter. Like the quarters gone by, 1QFY14 also witnessed lower NPA ratios. While the absolute gross NPAs remained flat, the ratio improved to 0.37% in 1QFY14 from 0.46% in 1QFY13. On similar lines Net NPAs showed improvement and reduced to 0.29% in 1QFY14 from 0.39% in 1QFY13. The provisions remained high during the quarter. 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.
What to expect?
At the current price of Rs 164, the stock is valued at 0.8 times FY15 estimated book value.

While lot of anxiety prevails pertaining to power sector and the pain therefrom, REC has demonstrated growth with quality over the years. The first quarter of FY14 also reported stable margins that stood out one of the best in the industry. Disbursements grew at a healthy pace, but sanctions remained moderate on account of the macro headwinds.

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, sufficient networth, quality book and healthy returns to shareholders make us positive on the company. Therefore, we reiterate our BUY view on the stock and recommend investors to stay invested in the stock for healthy returns. However, please do ensure that no stock forms more than 3-5% of your overall equity portfolio.

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