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Rural Electrification Corp: A strong quarter - Views on News from Equitymaster
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Rural Electrification Corp: A strong quarter
Dec 3, 2014

REC Limited declared its results for the second quarter of financial year 2014-2015 (2QFY15). The institution has reported 23.3% YoY growth in net interest income and 35.1% growth in net profits for the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income rises by 23% YoY in 2QFY15 on the back of 21% increase in disbursements.
  • Net interest margins expand by 0.2% YoY to 5.1% during the quarter.
  • Non-interest income rises by 40.4% during the quarter as compared to a 33% YoY decline reported in the preceding quarter.
  • Operating expenses rise by 14% YoY.
  • Net NPAs for the quarter come in at 0.67% in 2QFY15 from 0.27% a year ago.
  • Net profits grow by 35.1% YoY in 2QFY15 on a higher NII growth, coupled with higher other income and a lower tax outgo.

Financial summary
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Income from operations 41,672 49,862 19.7% 80,813 96,343 19.2%
Interest expended 25,194 29,545 17.3% 48,213 57,068 18.4%
Net Interest Income 16,478 20,317 23.3% 32,600 39,275 20.5%
Net interest margin (%)       4.9% 5.1%  
Other Income 571 801 40.4% 1,444 1,387 -3.9%
Operating expenses 513 582 13.6% 1,077 1,165 8.2%
Provisions and contingencies 340 180 -47.2% 891 1,392 56.1%
Profit before tax 16,196 20,356 25.7% 32,075 38,105 18.8%
Tax 5,089 5,349 5.1% 9431.5 10270 8.9%
Profit after tax/ (loss) 11,107 15,008 35.1% 22,644 27,835 22.9%
Net profit margin (%) 26.7% 30.1%   28.0% 28.9%  
No. of shares (m)         987  
Book value per share (Rs)         238  
P/BV (x)*         1.4  
* (Book value as on 30th September 2014)

What has driven performance in 2QFY15?
  • Disbursements for REC rose by 21% YoY during the quarter. While sanctions were down by 35% YoY. The T&D or Transmission and Distribution segment formed about 54% of the total disbursements during the quarter; while the segment formed about 37% of the total sanctions during the quarter. Nevertheless, the weak sanctions growth during the quarter indicates that the power sector recovery is still away.

  • Total borrowings increased by 18% YoY during the quarter as compared to a year ago. The borrowing profile for REC continues to remain in good stead with more than 80% borrowings coming through bonds. As such, the company would remain least affected with fluctuations in interest rates.

  • NIMs remained stable levels at 5% during 2QFY15, with marginal improvement in yields. The cost of funds on the other hand stood at 8.76% at the end of the quarter as compared to 8.6% in same quarter last year.

  • The operating expenses for the company went up by 14% YoY led by higher other expenses.

  • REC's profit before tax was given a fillip by higher other income coupled with lower provisions during the quarter. Further, a lower tax outgo led the company's profit after tax to jump by 35% YoY.
What to expect?
At the current price of Rs 334, the stock is valued at 1.2 times our estimated FY16 book value.

While historically REC has maintained the quality of its asset book, the year so far has been exception it seems. Bad loans jumped higher and gross NPAs stood at 0.86% in 1QFY15 and 0.82% in 2QFY15. A year ago, the same figure stood at 0.35%. 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.

We maintain our view that while investors can continue holding 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. While things seem to be picking up from the government's side, there is yet a lot of tangible development that needs to be witnessed.

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