Rural Electrification Corporation Ltd. - GEPL CAPITAL

Q3FY12 –Asset quality deteriorates further

- REC reported PAT growth of 15.9% Y-o-Y in Q3FY12 mainly on back of income by way of foreign exchange fluctuation during the quarter.
- NII grew by 18.5% Y-o-Y in Q3FY12 as increase in cost of funds was much higher than increase in yield on funds.
- NIM for the quarter stood at 4.3% vs 4.5% in Q2FY12 and 4.6% in Q3FY11.
- Disbursements have grown by 24.9% Y-o-Y in Q3FY12.
- GNPA stood at 0.5% in Q3FY12 vs 0.3% in Q2FY12.

Result Highlights

Margins under pressure as cost of funds increasing

NIM came down by 13bps sequentially and 24bps Y-o-Y basis as cost of funds increased by 7bps Q-o-Q whereas yield on funds increased by only 2bps Q-o-Q basis. Cost of funds for the quarter stands at 8.4% and yield on funds at 11.4% in Q3FY12. Spread has come down to 3.04% in Q3FY12 vs 3.24% in Q3FY11.

Business growth strong as disbursements clocked 25% in Q3FY12

Disbursements have grown by 24.9% Y-o-Y basis taking Disbursement-Santion (DS) ratio to 67% in Q3FY12 vs 34.5% in Q3FY11. Huge difference in DS ratio is due to negative growth in sanction to 35.6% y-o-Y basis. Asset quality concerns have slowed down the sanction process. All new sanction done by REC are with government guarantee and management as such sees no concerns on asset quality front as till now there no restructured account with the company. Rajasthan is the only one account which has put an request for restructuring its Rs.11 bn loan. The management expects to achieve 25% growth in loan book in FY13E.

PAT growth supported by forex gains

The company has made a forex gain of up to the tune of Rs.866 mn in Q3FY12 which has added to profitability. If we adjust PAT for this amount the growth would have been 2.9% Y-o-Y in net profits.

New provision requirement on standard assets to impact profits marginally

As per RBI recommendation to maintain provisions on standard assets, the board of the company is in discussion to implement the same. The management expects that it would need to incur an amount to the tune of approximately 3% of PAT if the same is approved.

Valuation & Viewpoint

The company has reported good set of numbers but when looked in with greater details profits are mainly supported by one-time gains and asset quality is showing stress in line with industry concerns in power sector. At CMP, the stock is trading at 1.24x and 1.08x book value of FY12E and FY13E respectively.

Source : Equity Bulls

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