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REC: Sanctions see a revival - Views on News from Equitymaster

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REC: Sanctions see a revival
Nov 22, 2012

Rural Electrification Corporation (REC) declared its results for the second quarter of the financial year 2012-13 (2QFY13). The institution grew its net interest income and profits at 35% YoY and 53% YoY respectively.

Performance summary
  • Income from operations grows 29% YoY in 2QFY13 as well as in 1HFY13, on the back of 24% YoY growth in advances (excluding interest accrued and due).
  • Disbursements grow by 25% YoY, sanctions increase by 51% YoY in 1HFY13.
  • Non-interest income increases 32% YoY during the quarter, while increasing by 46% YoY during the first half of the financial year.
  • NIMs increase to 4.7% at the end of 1HFY13 from 4.4% at the end of 1HFY12 on higher yields.
  • Bottomline grows by a benign 53% YoY in 2QFY13, on a lower base and 42% in 1HFY13 on lower forex losses and a strong increase in Net Interest Income.

Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Income from operations 25,145 32,405 28.9% 48,274 62,373 29.2%
Interest expended 15,649 19,603 25.3% 29,680 37,917 27.8%
Net Interest Income  9,497 12,802 34.8% 18,594 24,456 31.5%
Net interest margin**       4.4% 4.7%  
Other Income 555 733 31.9% 1,156 1,691 46.4%
Forex (gain)/loss 1,256 140 -88.8% 1,328 514 -61.3%
Operating expense 436 585 34.2% 855 1,040 21.7%
Provisions and contingencies - -   250 -  
Profit before tax 8,360 12,809 53.2% 17,317 24,593 42.0%
Tax 2,118 3,270 54.4% 4,454 6,286 41.1%
Effective tax rate 25.3% 25.5%   25.7% 25.6%  
Profit after tax/ (loss) 6,243 9,539 52.8% 12,862 18,306 42.3%
Net profit margin (%) 24.8% 29.4%   26.6% 29.3%  
No. of shares (m)         987  
Book value per share (Rs)*         167.9  
P/BV (x)         1.3  
* On a trailing 12-months basis

What has driven performance in 1HFY13?
  • Despite high interest rates, and a slowdown in infrastructure activity, especially in the power space, REC saw its loan book grow by 24% YoY in 1HFY13. Sanctions saw a comeback and increased by 51% YoY in 1HFY13. Disbursement growth was also healthy coming in at 25% YoY. Disbursements had a higher leaning towards T&D (Transmission and Distribution) with 44% going to the segment, compared to 38% previously. Generations projects got a 40% share (52% previously), thus REC has been a bit cautious towards this segment. 83% of the company's loan book continues to be exposed to state governments.

    Fresh sanctions see a comeback...
    (Rs m) 1HFY12 1HFY13 Change
    Sanctions 319,580 483,380 51.3%
    Disbursements 116,020 144,930 24.9%
    D/S ratio 36.3% 30.0%  
    Advances*   903,730   1,119,650 23.9%
    * 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. Therefore there are very few downsides to REC's NIM even in a rising interest rate scenario. Also, its borrowings from banks stand at only 6% of its overall borrowing portfolio in 1HFY13. A bulk of its borrowings comes from bonds with forex borrowings accounting for 13% of the total. Despite an overall increase in cost of funds, REC's margins improved to 4.7% from 4.4% at the end of 1HFY12.

  • REC had 0.44% gross NPA levels at the end of 1HFY13; this is an increase from 0.30% levels seen in 1HFY12. The institution has not seen an increase in slippages during the quarter. It does not believe that it will see a significant increase in NPAs till the end of this year; however we have been more conservative in our estimates. The power sector prospects have improvement somewhat with the government announcing a bailout package for discoms and there being more traction on fuel supply issues.

What to expect?
At the current price of Rs 223, the stock is valued at 1.2 times our estimated FY15 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 along with the bailout plan by the banks and state governments will help them meet their loan obligations. However, even in a high interest rate environment, REC is well equipped to manage NIMs and spreads, on account of its overseas borrowings and through low cost bonds, however forex losses can prove to be the dampener. The financer has also already increased its lending rates in order to offset higher costs. Sectoral risks still remain with regards to coal availability for power projects, slowdown in infrastructure growth, and slow investment cycle. We reiterate our buy view on the stock on account of the reasonable valuations the stock is trading at currently and huge scope for growth within the sector.

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