After the announcement of its results on February 9, the stock of India’s state-run power projects financier Rural Electrification Corporation (REC) fell over 9 per cent in three trading sessions, to close Rs 236.65 last Friday. The fall is far more than the 0.3 per cent decline in the Bombay Stock Exchange benchmark Sensex, and adds to the stock’s underperformance since October 2010, consequent to fears of business slowdown and margin pressure due to rising interest rates. Although analysts expect some moderation in the company’s performance in the coming quarters, they continue to have a ‘buy’ rating on the stock due to REC’s robust long-term business outlook and valuations. These look reasonable now.
Q3: Above expectations
For the quarter ended December 2010, strong loan growth drove REC’s net interest income (NII) by 36 per cent year-on-year, which, coupled with net interest margin (NIM) expansion, enabled its net profit to post a handsome growth of 40 per cent.
While REC’s NIMs were up 47 basis points to 4.56 per cent on a yearly basis, they were higher by 17 basis points (bps) on a sequential basis too. Although NIMs were affected in the September 2010 quarter due to payment of Rs 35 crore upfront fees towards external commercial borrowings (ECBs) raised, REC has been able to shrink its cost of funds by 16 basis points sequentially to 7.8 per cent, primarily due to better liability management and relatively low cost of ECBs.
| SLOWING, BUT HEALTHY | |||
| In Rs crore | Q3-FY11 | FY11E | FY12E |
| Net Interest Income | 848 | 3,383 | 3,962 |
| % chg y-o-y | 35.6 | 34.2 | 17.1 |
| Total Income | 940 | 3,545 | 4,116 |
| % chg y-o-y | 38.6 | 27.4 | 16.1 |
| NIM (%) | 4.6 | 4.5 | 4.3 |
| Change in bps | 47 | 10 | -20 |
| Net profit | 664 | 2,498 | 2,880 |
| % chg y-o-y | 40.1 | 24.8 | 15.3 |
| Price/ Book (x) |
– | ||
Going ahead, it plans to raise $250 million through ECBs, $100 million coming from Bank of Tokyo Mitsubishi and the rest in loans from other financial institutions. It has already raised $900 million in 2010-11 so far. Additionally, it is targeting to raise Rs 2,000 crore via sale of bonds in the domestic market, including Rs 1,000 crore of infrastructure bonds by March 2011. These moves will help it meet its overall borrowing requirement of Rs 25,000 crore for 2010-11.
Outlook
While loan growth in the December quarter was healthy, at 21 per cent on a yearly basis to Rs 75,744 crore, it lagged the over 25 per cent growth rates posted in the first half of 2010-11 (26 per cent) and 2009-10 (30 per cent). Disbursements as well as sanctions remained flattish on a yearly basis, at Rs 6,008 crore and Rs 10,591 crore, respectively, due to delays in award of contracts by states. Faster growth in loans (of 70 per cent) to private players, however, supported overall growth in loans. REC aims to disburse Rs 23,000 crore in 2010-11, which looks achievable, given that it has disbursed Rs 16,199 crore in the first nine months.
For 2011-12, analysts expect REC’s loan growth to stabilise around 22 per cent, led by slowing disbursements and higher competition. Its disbursements are estimated to grow by 18 per cent, with some cushion from undisbursed loans of over Rs 100,000 crore.
With interest rates on the rise, the company expects its cost of borrowing to go up to 8.1 per cent from 7.85 per cent at present. However, REC is looking to raise its lending rates by 50 bps in the next few weeks. This should support NIMs and yield on loans in the near term. In the long term, however, rising interest rates may keep its margins under pressure. It may slip by 25-30 bps from the current level to around 4.2-4.3 per cent in 2011-12 and 2012-13, say analysts.
Overall, analysts expect REC to post compounded earnings growth of 24-26 per cent and average return on equity (RoE) of 20 per cent over 2011-12. On the flip side, while near-term headwinds persist, potential delays in the power projects, regulatory changes and poor health of the state electricity boards are among key macro risks.
