Rural Electrification

Investors can consider buying the Rural Electrification Corporation (REC) stock as it has immense growth prospects. However, phased buying is recommended given the run-up in PSU stocks and the likelihood of a volatile market. The NBFC has managed a high rate of growth, thanks to a transition from being a rural electrification financier to a player with a presence across the power value chain. REC’s advances have grown at 19 per cent compounded annually in the 2003-08 period. At the current market price of Rs 138, REC trades at 1.85 times its estimated book value and 9.9 times its estimated 2008-09 earnings. Secured lending (more than 90 per cent advances backed by government guarantees), improved asset quality (0.13 per cent gross NPAs in December 2008), sustainable spreads (3 per cent) on the back of low-cost borrowing and zero mandatory reserve (it doesn’t fall under RBI supervision) requirements, are key positives for the company, relative to other financial stocks.

REC acts as a nodal agency for the APRDP-II programme and the Rajiv Gandhi Grameen Vidhyuthikaran Yojana (RGGVY, outlay of Rs 33,000 crore), which ensures steady demand for funds. Its cost of funds is low (at 7.7 per cent), as 34 per cent of the borrowings come from tax-free bonds. The rest of the borrowings also come at relatively low rates, given the sovereign bond rating. REC is also assured of good appetite for its bonds, as some of these issuances (for example, energising pumpsets) are eligible for priority sector lending by banks.

REC’s net profit for first nine months of 2008-09 (March numbers yet to be declared) grew at 44 per cent, aided by improving spreads and advances growth. Its ability to source funds at low cost and also lock into loans at higher rates, led to margins expanding to 3.24 per cent. The management envisages a 4 per cent spread for the March quarter. Yields may see improvement as loans amounting to Rs 2,800 crore and Rs 7,800 crore are coming for reset in rest of FY2009 and FY2010.

Disbursals have grown at 50 per cent over last year and REC expects to disburse Rs 17,000 crore by end of the year. As of December 2008, the gap between sanctions and disbursement widened further to Rs 1,20,000 crore, and stood at 2.4 times its outstanding borrowing. The gap points to strong advances growth in coming quarters. The advance book is skewed towards the transmission projects (50 per cent of the total advances) with a higher percentage of incremental sanctions to be given to the generation sector.
Risk

Interest cost may see some increaseas the proportion of 54EC capital gain bonds is coming down. Delays in projects may affect profitability and could also require restructuring. Disinvestment by the Government (currently holds 82 per cent in REC) will be a positive trigger to the stock, improving liquidity.

via BL