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REC: Loan sanctions show de-growth - Views on News from Equitymaster
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REC: Loan sanctions show de-growth
Nov 25, 2013

Rural Electrification Corporation (REC) declared its results for the second quarter (2QFY14) and first half (1HFY14) of the financial year 2013-14. The institution grew its net interest income by whopping 34.2% YoY and profits by 16.4% YoY during the quarter. For 1HFY14, the profits grew by 23.7% YoY. Here is the analysis of the results.

Performance summary
  • Net Interest Income grows by 34.2% YoY in 2QFY14 on the back of healthy expansion in spreads
  • Disbursements grow by robust 8.3% YoY, sanctions recorded a lower 31.0% YoY growth in 2QFY14.
  • Non-interest income disappoints with decline of 36.7% YoY during the quarter,
  • NIMs rise to 4.9% in 2QFY14 from 4.6% in 2QFY13 on higher yields.
  • Bottomline grows by decent 16.4% YoY in 2QFY14 on a higher NII growth.

Standalone financial summary
Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Income from operations 32,919 42,104 27.9% 63,604 81,920 28.8%
Interest expended 19,603 24,240 23.7% 37,917 46,679 23.1%
Net Interest Income 13,316 17,864 34.2% 25,687 35,241 37.2%
Net interest margin** 4.6% 4.9%   4.5% 4.9%  
Other Income 219 138 -36.7% 460 336 -26.9%
Forex (gain)/loss 140 954   514 1,534  
Operating expense 585 854 46.1% 1,040 1,746 67.8%
Provisions and contingencies - -   - 223  
Profit before tax 12,809 16,194 26.4% 24,593 32,074 30.4%
Tax 3,270 5,088 55.6% 6,286 9,431 50.0%
Effective tax rate 25.5% 31.4%   25.6% 29.4%  
Profit after tax/ (loss) 9,539 11,107 16.4% 18,306 22,643 23.7%
Net profit margin (%) 29.0% 26.4%   28.8% 27.6%  
No. of shares (m)         987  
Book value per share (Rs)*         191.8  
P/BV (x)         0.8  
* (Book value as on 30th September 2013)
** Annualized

What has driven performance in 2QFY14?
  • REC reported decent 16.4% YoY growth in profits largely driven by impressive NII growth that was recorded at 34.2% YoY. Higher tax expenses and higher operating expenses restricted the profitability growth for the second quarter of FY14. Other income too disappointed as it reported 36.7% YoY decline during 2QFY14.

  • On the business front, the scenario is quite tepid. Sanctions have declined by almost 31% and disbursements reported subdued growth of 8.3% during 2QFY14. Sanctions from T&D segment dropped to 41% levels in 2QFY14 from higher levels of 82% in 2QFY13. The disbursement scenario also appeared bleak during 2QFY14 with no major upticks across segments. Consequently, the overall loan growth was reported at mere 8.7% YoY for the quarter ended September 2013.

    Sanctions drop, disbursements subdued ...
    (Rs m) 2QFY13 2QFY14 Change
    Sanctions 265,490 183,200 -31.0%
    Disbursements 76,290 82,640 8.3%
    D/S ratio 28.7% 45.1%  
    Advances* 1145745.3 1,245,222 8.7%
    * excludes interest accrued and due

  • The borrowing profile for REC continues to remain in good stead with 57% borrowings coming through bonds and mere 5% from bank borrowings. Hence interest rate fluctuations should not harm the company's performance.

    Borrowing Profile
    (Rs m) 1HFY13 % of total 1HFY14 % of total Change
    Capital Gain Bonds 177,260 19% 262,710 22% 48.2%
    Institutional Bonds 584,830 62%  671,450 57% 14.8%
    Banks, FIs, etc. 53,740 6% 55,070 5% 2.5%
    Foreign Currency 120,390 13%  160,980 14% 33.7%
    Commercial Paper 14,700 2% 27,700 2% 88.4%
    Total 950,920 100% 1,177,910 100% 23.9%
    * FIs = financial institutions

  • The operating costs for the company stood exceptionally high during the second quarter. The operating expenses reported 46.1% YoY jump in 2QFY14, with cost to income ratio at 5%. For first half of FY14, the company reported 67.8% YoY jump in operating expenses. The company needs to be cognizant about the rising operating expenses going forward. While the absolute growth in costs is worrisome the fact that REC's cost to income ratio remains in single digits and one of the lowest in the financial sector is a huge comforting factor.

  • REC continues to maintain the quality of its asset book despite the tough environs. While the gross NPAs in absolute terms remained stable, the gross NPA ratio moved down marginally to 0.35% in 1HFY14 from 0.44% in 1HFY13. The net NPAs too were seen down to 0.27% in 1HFY14 from 0.38% in 1HFY13. 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 213, the stock is valued at 0.8 times FY16 estimated book value.

While the macro-headwinds took a toll on REC's credit portfolio, the quality of the book continues to remain in good stead. Moreover, the margins continue to look up with consistent expansion in spreads. The borrowing profile remains intact bolstering the company's balance sheet and earnings.

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. 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. However please ensure that no stock forms more than 3-5% of your portfolio.

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