REC: Growth, Development, Progress... - Outside View by Luke Verghese

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REC: Growth, Development, Progress...
Dec 15, 2010

More the merrier is the mantra

The Central government specializes in promoting Corporations and Statutory bodies at the drop of a hat. If nothing else it provides more than enough work for the Public Enterprises Selection Board which is charged with the task of filling vacancies to the boards of PSUs. The power sector in particular reeks of a plethora of entities of every hue. Just about every type of power that is generated for example is operated by a different entity - from hydro, to thermal, to lignite, to nuclear, to non conventional energy, et all. Then there are transmission companies and distribution companies. Add to this an entire gamut of entities, which complement the functioning of the generators and transmitters. And, yet other statutory bodies and other busy bodies, which oversee the functioning of the electricity sector. In some instances there is more than one company which has the same task on hand, barring a minor change in its constitution. Then there are those who have not been given the right name plates, given the task assigned to them, but this a minor error. About all that is now left for the Sarkar to do, to complete the holy pantheon is, to incorporate an entity which will be tasked with the job of putting an end to power cuts, and shutdowns, which is the bane of our cities, towns, and villages. Hopefully this too will see the light of day.

Out of pocket

And what we got to show for it at the end of this exercise? The country is hopelessly out of pocket on the power front. The chairman of Rural Electrification Corporation (REC) in his letter to the shareholders puts it in perspective. Says Dr Pathak ...”The working group on Power for Plan XI has estimated the overall requirement of funds for the power sector to the tune of Rs 10.3 trillion. To meet the projected demand for power by 2017 and coinciding with the XII Plan, the country has to set up additional generating capacity of 100,000 MW. The total fund requirement for this plan period is estimated at Rs 11 trillion. As per the estimates of the Central Electrical Authority the investment for the transmission system development in the XI Plan and XII Plan is collectively estimated at Rs 3.8 trillion. The combined requirement of funds for the distribution sector in the two Plans is estimated at Rs 6.6 trillion”. Cumulatively that looks like all the money in the world, and then some more, assuming that the Planning Commission and the Central Electricity Authority got their figures right in the first place. Needless to add the way the country goes about chasing targets, the figures that will be bandied about for Plan XIII will be a multiple of the figures for Plan XII. If nothing else, REC is going to be around for a very long time to come.

A mega bank

The nomenclature REC is a misnomer in a manner of speaking. The company is a bank and a mega large one at that. The latest annual report features a photograph of the chairman of Rural Electrification Corporation receiving the golden trophy for the best managed bank, financial institution in FY09. For sure, it is in the business of rural electrification. Set up some 41 years ago, its original mandate was mainly to finance rural electrification schemes, by lending monies to state electricity boards, and to accelerate the pace of rural electrification, with a view to increasing agricultural production in the country. It is today one of the leading public financial institutions, financing all kinds of power projects from generation, transmission, distribution etc, without any restrictions. The management should seriously think of renaming the company as 'The All India Power Financing Company Ltd' taking into account its expanded role.

REC has a 'competitor' in the Power Finance Corporation of India which came into being in 1986. It has a slightly more tacky charter in what it does with its funds flow, but basically it too is in the financing of power sector projects, back to back.

A large mass of data, but skewed

The company has provided a mass of data sheets to show the good work that it is doing in providing finance for the generation, transmission, and distribution of power. Among the details is the info that it has electrified till the end of the last year over 496,500 villages – up from the over 304,700 villages 10 years ago. It has sanctioned assistance during the year worth Rs 454 bn, up from Rs 63 bn, ten years ago. That is a huge jump in sanctions. The data on disbursements is less lustrous though. Disbursements during the year increased to Rs 271 bn from Rs 41 bn, some ten years ago. Disbursements as a percentage of sanctions stood at 60% against 65% ten years ago. An analysis of the cumulative state wide sanctions made in the last 40 years shows that the company's priorities are rather skewed. All the 29 present states and one Union territory are the beneficiaries of its largesse of the collective loans sanctioned of Rs 2.7 trillion. The state that received the largest cumulative sanctions in rupee terms is Maharashtra at around Rs 330 bn. Next in the pecking order is Tamil Nadu with Rs 257 bn followed by Andhra Pradesh with Rs 247 bn. The BIMARU states rank further behind. Uttar Pradesh, the most populous state, along with its breakaway faction of Uttaranchal got Rs 238 bn, while Bihar and Jharkhand together got only Rs 128 bn. Madhya Pradesh along with Chhattisgarh got Rs 178 bn while Rajasthan made do with Rs 206 bn. On a per capita basis the figures will get even more skewed. Gujarat for example garnered Rs 149 bn, while Haryana got an impressive Rs 106 bn, and Punjab got a humungous Rs 169 bn. The yardsticks, if any at all, that this Central government sponsored company used, to shower its blessings on rural India are not known. What is very clear is that the states that needed the most leg up, to make a start in life, were in a sense the most deprived. Hopefully this anomaly will be rectified.

On a roll financially

Financially however the company is on a roll. It is heavily geared, but that aint a problem here. On a paid up equity (standalone) of Rs 9.9 bn, its borrowings are around Rs 560 bn. The vast bulk of its borrowings amounting to Rs 462 bn represent moneys lapped up through capital market instruments, including taxable and non-taxable bonds, and capital gains bonds, which are specifically designed for issue by infrastructure development companies. The balance represents foreign currency borrowings, loans from banks, and issues of commercial paper, etc. It has lent out Rs 664 bn, of which Rs 584 bn or 88% has gone into the coffers of the state electricity boards. It has also made liquid investments to the tune of Rs 9 bn, the bulk of it in bonds issued by state governments, and the balance in companies floated by it. The company also had cash balances of Rs 14 bn at year end.

In other words, it has invested a lot more than it has borrowed. The difference between the two figures lies in the cumulative profits that it has made over the intervening period, and which lie hidden in the accumulated reserves of Rs 101 bn, share capital, depreciation, etc. The company apparently makes some margin between the rate at which it borrows (average rate of 7.7%), and the rate at which it lends (average rate of 10.9%). The 3.2% spread that it can avail of, isn't much in itself, but given the humungous sums of dosh that it has access to, the benefit of a captive audience at that, and the other low operating costs, ensures that the bottom-line more than adds up. The big advantage here also is that since it lends primarily on a bulk basis to other state government institutions, it does not have to provide for bad and doubtful debts, which for an institutional like REC, can be more than a bother otherwise. As a matter of fact the provision for such doubtful debts during the year was a mere pipsqueak of over Rs 200 m. In reality, by both lending and investing in the government sector, it obviates the need to provide for bad debts on capital account (sovereign debt), or for non receipt of interest dues on revenue account. (The big wonder here is how it manages to keep a tab on the electricity boards. The vast bulk of them are on hock, given that the state governments do not reimburse the electricity boards for power supplied free, or at below cost. Or as in the case of Orissa, where 50% of the power generated is stolen, or lost in transmission, partly because the meters are tampered with, or there are no meters to start with).

Investing in rural India has its rewards

Investing in rural India has its many rewards apparently. The company turned out a pretax profit margin of over 39% on its gross revenue streams. On an income of Rs 67 bn, it tuned in with a pretax profit of Rs 26.5 bn. With the tax man swallowing only 26% on the pretax profit, the retained profits were a very sizeable Rs 20 bn. Good enough for the company to declare a dividend of Rs 6.50 per share (Rs 4.50 last year) on a face value of Rs 10 per share. The Central Government holds 67% of the paid up equity, while foreign institutional investors hold another 18% as of March 2010.

The only factor that apparently inhibits the company from growing faster is its ability to tap additional debt fast enough on the one hand (apparently debt: equity ratios do not apply to it, or do they?) and the wherewithal of its clientele on the other, to set up the infrastructure that they are tasked to do in the first place. This is a 'Bank' that is definitely worth banking on.


This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "REC: Growth, Development, Progress..."

Srinivasan M

Dec 26, 2011

Dear Sir,

You say this bank can be banked upon.? But lending to SEB's which are out of pocket is a very risky business. State government themselves are out of pocked many times. Raising power tariff has huge political implications for state governments. So SEB's are already broke. They exist just as name sake. I think almost all of REC lending is doubtful debt. Power tariff rate is not catching up with power production rate. Add to it cost of theft, subsdised rate for farmers, loss in transmission. REC is not regulated by any orgn, except for the babus. So any investment here is not worthy for the shareholders. Your article paints a rosy picture for REC.



Dec 20, 2010

I am afraid the article may mislead the reader. Luke himself gives out statistics of REC- namley own capital of 111 bn (9.9 equity+ 101 reserves), and loan portfolio of 664 bn- implying a good capital adequacy ratio of nearly 15%- much better than most banks. The why this insinuation that "apparently debt: equity ratios do not apply to it, or do they?".
Another flaw in the article is sensationalism. Any orgainisation whether manufacturing or a financial instituition "invests" lot more than it borrows. Even a child studying commerce in 11th standard knows that "networth" or "own funds" in Indian parlance or "equity" as commonly called Internationally is the sum of "Paid up capital" plus "Reserves" (created out of either undistributed profits or collected from shareholder by way of premium on issued capital etc.). And "reserves" are not "Hidden" in a balance sheet. Then why sensationalise that it has invested more than borrowed?
As regards statewise distribution/lending I suppose it reflects the general development pattern in our country. Rather I would say "Bimaru" sates look better in this report than on most other parameters.

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