Analyst corner: With improving asset quality, retain ‘buy’ on REC stock

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Published: December 12, 2018 2:14:29 AM

REC’s core business remains strong with improving asset quality and revival in loan growth.

Loan growth revived to 19.1% y-o-y driven by a strong 76.2% growth in disbursements.

Rural Electrification Corp (REC) reported a strong Q2FY19 with a PAT of Rs 1,760 crore (up 25.3% y-o-y) primarily on marked-to-market forex gains of Rs 1,050 crore. Though PAT was ballooned by forex gain, operating performance remained robust with a strong pick-up in loan book (up 19.1% y-o-y), a significant 29 bps q-o-q uptick in margin to 4% and improvement in asset quality (GNPA down by 20 bps q-o-q at 7.9% with a comfortable coverage of 46%).

News flow regarding acquisition of PFC by REC has created a significant amount of uncertainty on capital position, possibility of a holding company discount (if PFC becomes a subsidiary) and limited benefits from synergies (as both compete in the same space); however, with improving asset quality and revival in loan growth, we retain ‘Buy’ rating on the stock.

Loan growth revived to 19.1% y-o-y driven by a strong 76.2% growth in disbursements. Though growth was across segments, it was contributed largely by state sector (23.9% y-o-y; 79.4% of loans); (b) generation segment (45.4% of loans) grew 17.8% y-o-y, while transmission & distribution segment (48.8% y-o-y) grew relatively lower at 13.2% y-o-y; (c) growth in renewable segment (4.6% of loans) — a key focus area for growth — was significantly higher at 388% largely on a favourable base; and (d) margin improved 29 bps q-o-q to 4.1% due to a sharp 35 bps q-o-q increase in yields to 10.7% and a flat q-o-q cost of funds at 7.3%.

REC’s core business remains strong with improving asset quality and revival in loan growth. Ability of REC to raise low-cost resources (recently did an ECB of $700 milllion through MTN) and nodal agency status will help it maintain the historical track record.

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