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Rural Electrification Corp: Tepid growth - Views on News from Equitymaster

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Rural Electrification Corp: Tepid growth
Sep 5, 2014

Rural Electrification Corporation (REC) declared its results for the first quarter of the financial year 2014-15 (1QFY15). The institution grew its net interest income by 17.6% YoY and profits by 11.2% YoY during the quarter. Here is the detailed analysis:

Performance summary
  • Net Interest Income from grows by decent 17.6% YoY in 1QFY15 on the back of healthy 17% increase in the loan book.
  • Margins on YoY basis are constant at 5% levels.
  • Non-interest income disappoints with decline of 32.9% YoY during the quarter.
  • The operating expenses remain under control with spike of mere 3.4% YoY.
  • The provisioning costs stand higher, move up by staggering 120% YoY.
  • The Net NPAs for the quarter spike to 0.7% in 1QFY15 from 0.3% a year ago.
  • Bottom-line grows by 11.2% YoY in 1QFY15 on a higher NII growth.

Standalone Financial Snapshot
Rs (m) 1QFY14 1QFY15 Change
Income from operations 39,141 46,481 18.8%
Interest expended 23,019 27,523 19.6%
Net Interest Income 16,121 18,958 17.6%
Net Interest Margin (NIM) 5.0% 5.0%  
Other Income 873 586 -32.9%
Operating expense 564 583 3.4%
Provisions and contingencies 551 1,212 120.0%
Profit before tax 15,880 17,749 11.8%
Tax 4,343 4,921 13.3%
Effective tax rate 27.3% 27.7%  
Profit after tax/ (loss) 11,537 12,828 11.2%
Net profit margin (%) 29.5% 27.6%  
No. of shares (m)   987  
Book value per share (Rs)*   222.8  
* (Book value as on 30th June 2014)
** Annualized

What has driven performance in 1QFY15?
  • The profitability for the first quarter of the new financial year was largely driven by the healthy top-line growth for REC. While the other income disappointed, the provisions during the quarter proved as a drag for the profitability of the company.

  • While the disbursements for REC grew at a modest pace for the first quarter at 2.1% YoY growth, the sanctions declined by huge 29% YoY. While T&D or Transmission and Distribution segment contributed 78% to the total sanctions, the contribution to disbursements were seen at 48% during the quarter. The weak sanctions growth during the quarter indicates that the power sector recovery is still away.

  • The borrowing profile for REC continues to remain in good stead with 41% borrowings coming through bonds and 37.2% from bank borrowings. Hence the company would remain least affected with fluctuations in interest rates.

  • Spreads have remained stable levels at 3.6% during 1QFY15, with the slight improvement in yields. The cost of funds on the other hand has moved up albeit at moderate levels.

  • The operating costs for the company went up by mere 3% during the first quarter. The company is well cognizant about the rising operating expenses going forward.

  • While historically REC has maintained the quality of its asset book, 1QFY15 was an exception. The bad loans jumped higher and gross NPAs stood at 0.86% (1QFY15) as against 0.37% a year ago. Provisions too have burgeoned for the quarter indicating asset quality pressures lying ahead. 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 272, the stock is valued at 1.0 time FY16 estimated 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.

While investors can continue to hold on to the stock of REC, the upside in stocks related to power sector remains largely dependent on favorable regulations, adequate fuel supply and improved financials for SEBs, which could warrant a revision in valuations.

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