New Delhi, November 16,2017: Rural Electrification Corporation’s (REC) Q2FY18 PAT at ~INR12bn came below estimate due to muted NII traction following NIMs pressure (lower incremental lending yields as health of stressed utilities is improving, in general and REC, in particular is relatively more focused on better rated utilities). REC has been following RBI norms from FY15 and overall asset quality held in good stead—GNPLs remained flat QoQ though S4A was invoked in a private project (Ratan India) with exposure of INR7.5 bn.
According to the reports published in moneycontrol.com Over the last few quarters, large part of stress emanated from known accounts and total stress pool (NNPAs + restructured) fell to 12.5% (13.2% in FY17). Business momentum was steady, with >10% YoY loan growth. Management maintained stance of potential upgradations starting Q3FY18 that will potentially help improve performance going ahead. At CMP, the stock trades at 0.8x FY19E P/BV for RoE of 15‐16%, rendering favourable risk‐reward. Maintain ‘BUY’ with TP of INR231.
Outlook
REC has not sprung any negative surprise with respect to stress in state utility projects. However, key monitorable is its private sector exposure, though, in our view, significant recognition is unlikely over near term. Also, with UDAY scheme already being effected, we see better growth visibility for FY18-19. Despite NIM pressure, as incremental spreads are lower with structural improvement across power value chain, it has potential to deliver ~15-16% RoE, rendering favourable risk-reward. We maintain ‘BUY/SO’ moneycontrol.com further added.
