Buy REC on loan growth, stable asset quality

Maintain ‘buy’ on Rural Electrification Corporation (REC) on healthy loan growth…

Maintain ‘buy’ on Rural Electrification Corporation (REC) on healthy loan growth and stable asset quality. We assign a target price of R360 per share. The stock trades at 0.9x FY17e P/B . Acceleration in reforms could be a catalyst for re-rating.

Amid the underlying stress in power segment, REC managed to generate steady earnings CAGR of 20%-plus over FY09-14. While RBI’s recent move, to grant regulatory forbearance to banks for infrastructure lending, can exert pressure on profitability over the long term, near term growth and profitability is likely to remain healthy led by an outstanding sanctions of R18,600 crore, massive demand-supply mismatch and fragile health of SEBs. Moreover, with a stable government at the center, infrastructure bottlenecks are expected to be eliminated, which will be positive for growth and asset quality.

REC Q3FY15 PAT grew 12.4% y-o-y and down 8% q-o-q to R1,380 crore, In line with our estimate of R1400 crore. While the operating profit was in line with estimate, higher provisions of R190 crore led to 2% below estimate PAT. Loan growth was 18.6% y-o-y to R1.69 lakh crore, led by T&D segment, which grew more than 20% y-o-y and 5% q-o-q. During the quarter, loans to private sector grew 31% y-o-y and stands at R29,360 crore — 17.4% of overall loan book.

REC’s asset quality was stable sequentially, with GNPAs and NNPAs remaining flat at 0.79% and 0.65%.

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