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REC: Flat profits on forex hit

Nov 16, 2011

Rural Electrification Corporation (REC) declared its results for the second quarter of the financial year 2011-12 (2QFY12). The institution grew its net interest income and profits at 17% YoY and 13% YoY respectively.

Performance summary
  • Income from operations grows 27% YoY in 2QFY12 and 25% in 1HFY12, on the back of 24% YoY growth in advances (excluding interest accrued and due).
  • Disbursements grow by 14% YoY, sanctions however fall by 4% YoY in 1HFY12.
  • Non-interest income falls by just 18% YoY during the quarter, while falling 3% during the first half.
  • NIMs fall to 4.4% at the end of 1HFY12 from 4.6% at the end of 1HFY11 on higher borrowing costs.
  • Bottomline grows by a marginal 0.8% YoY in 2QFY12 and 6.6% in 1HFY12 on account of forex losses and higher interest costs.

Financial performance snapshot
Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Income from operations 19,877 25,145 26.5% 38,647 48,274 24.9%
Interest expended 12,081 15,649 29.5% 23,088 29,680 28.6%
Net Interest Income 7,796 9,497 21.8% 15,560 18,594 19.5%
Net interest margin**       4.6% 4.4%  
Other Income 677 555 -18.0% 1,194 1,156 -3.2%
Forex (gain)/loss (273) 1,256   (268) 1,328  
Operating expense 385 456 18.5% 727 874 20.1%
Provisions and contingencies 1 -   1 250  
Profit before tax 8,360 8,341 -0.2% 16,292 17,298 6.2%
Tax 2,178 2,112 -3.0% 4,237 4,450 5.0%
Effective tax rate 26.0% 25.3%   26.0% 25.7%  
Profit after tax/ (loss) 6,182 6,229 0.8% 12,056 12,848 6.6%
Net profit margin (%) 31.1% 24.8%   31.2% 26.6%  
No. of shares (m)         987  
Book value per share (Rs)*         142.5  
P/BV (x)         1.4  
* (Book value as on 30th September 2011)

What has driven performance in 1HFY12?
  • Despite rising interest rates, and a slowdown in infrastructure activity, especially in the power space, REC saw its loan book grow by 24% YoY in 1HFY12. Sanctions however saw a decline, falling by 4% YoY in 1HFY12. Disbursement growth came in at 14% YoY. Disbursements had a higher leaning towards generation with 52% going to the segment, compared to 59% previously. T&D (Transmission and Distribution) projects got a 38% share (31% previously). 82% of the company's loan book continues to be exposed to state governments. REC plans to grow its loan book by around 25% this fiscal.

    Fresh sanctions take a hit...
    (Rs m) 1HFY11 1HFY12 Change
    Sanctions 332,700 319,580 -3.9%
    Disbursements 101,910 116,020 13.8%
    D/S ratio 30.6% 36.3%  
    Advances* 729,000 903,730 24.0%
    * excludes interest accrued and due

  • REC has witnessed an improvement in its net interest margin (NIM) in recent years. 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. Having said that, 13 rate hikes orchestrated by the RBI did lead to some margin erosion, which fell to 4.4% from 4.6% earlier.

  • Its borrowings from banks stand at only 8% of its overall borrowing portfolio. Thus, it may not be as exposed to bank's rising base rates, compared to other NBFC peers. It has not opted for bank loans this fiscal on account of the high base rate regime. Is has seen a huge increase in forex loans, preferring to avail of cheaper funds from abroad. The only unhedged portion of its forex borrowings is US$ 250 m, with the rest of the US$ 1.25 bn being fully hedged. Irrespective, it saw a Rs 1.3 bn forex loss, compared to a gain last year, contributing to a benign increase in profits.
    Borrowing Profile
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Capital Gain Bonds 102,650 17% 120,650 16% 17.5%
    Institutional Bonds 338,800 56% 481,970 64% 42.3%
    Banks, FIs, etc. 107,640 18% 62,620 8% -41.8%
    Foreign Currency 40,690 7% 90,960 12% 123.5%
    Commercial Paper 14,500 2% - 0% -100.0%
    Total 604,280 100% 756,200 100% 25.1%
    * FIs = financial institutions

  • REC had 0.3% gross NPA levels at the end of 1HFY12; this is an increase from 0.03% levels seen in 1HFY11. The increase in NPA levels was on account of non-performing assets of Maheshwar Hydroelectric project. REC is hoping that some necessary restructuring will be done for this particular project over the next few months. This account was shifted to the NPA side last quarter, REC has not seen further stress in other accounts, and has slowed down the sanctioning of loans. It does not believe that it will see a significant increase in NPAs till the end of this year. However in FY13 there may be some accounts which may need some restructuring. It has a Rs 85 bn exposure to Tamil Nadu Electricity Board, the account which was recently restructured by PNB from short term to long term loans. However, most of its exposure on this account is on the generation side and long term in nature. Thus, it is not seeing much stress on this account.

What to expect?
At the current price of Rs 186, the stock is valued at 1 times our estimated FY14 adjusted book value. As per the management, the company will try and maintain its asset quality as the Ministry of Power is building up pressure on various state governments in order to increase state electricity boards' (SEBs) tariffs. This will help them meet their loan obligations.

Even in a high interest rate environment, REC is well equipped to manage NIMs and spreads, on account of its overseas borrowings through ECBs. It has been able to maintain its spreads at 3.1% even with an the RBI's excessive rate hikes. The financer has also already increased its lending rates in order to offset higher costs. However some sectoral risks still remain with regards to coal availability for power projects, slowdown in infrastructure growth, and absence of tariff revision. Irrespective, it has seen robust loan growth, and this is expected to remain at around 20% for the fiscal. We reiterate our ‘Buy' view on account of the reasonable valuations the stock is trading at currently as most of the pains have been priced in.

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Jun 22, 2021 09:47 AM