Stock Pick From The Finance Sector

The Rural Electrification Corporation (REC) was the first public financial institution that exclusively focussed on financing the Indian power sector. The power sector, being one of the core sectors in infrastructure, has a tremendous growth opportunity going ahead. A tentative capacity of approximately 100000 MW is envisaged as part of the 12th Five Year Plan (2012-2017). The total funding requirement to achieve this target is estimated at around Rs 11000 billion. REC is one of the companies that will provide funds to power companies for setting up these huge capacities. Therefore, the growth opportunity for the company could be tremendous going ahead.

Even though the company lends to the power sector, it has not been affected by the headwinds that the sector has been facing and is in very decent shape. For the first nine months of FY12, the net interest income of the company increased by 19 per cent to Rs 2864 crore, while its profit after tax increased by 10 per cent to Rs 2055 crore. Further, even in a rising interest rate regime, the company’s Net Interest Margin (NIM) has consistently remained above 4.3 per cent in the previous seven quarters, which is very commendable.

When most lenders have slowed down the disbursement to power companies, REC has shown good loan growth, and consequently, a better asset quality buildup. For the first nine months of FY12, the loan disbursals increased by 11 per cent to Rs 17944 crore. Of this, the disbursement for the generation segment stood at around 49 per cent, while for that for the transmission and distribution segment accounted for 38 per cent. The remaining 13 per cent was towards short-term loans.

It should also be noted that approximately 89 per cent of the outstanding loans are from public sector enterprises, which are usually the state and central electricity boards. Its major borrowers being public sector entities, the chances of those accounts turning into Non Performing Assets (NPAs) are very less. This is also reflected in the company’s Net NPAs, which have been minimal over the past couple of years. For FY11, the Net NPAs stood at 0.002 per cent, but this has increased to 0.449 per cent in the first nine months of FY12.

Apart from its financial performance, another factor that adds strength to our conviction in the counter is that the company has been appointed as the nodal agency for the implementation of the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). The Union Budget 2012-13 has allocated additional funds to this programme, with the amount going up to Rs 4410 crore against Rs 3189 crore allocated last year. This will benefit the company. Also, the recent move by most of the state electricity boards to hike the tariffs will further benefit the REC, as it is more likely to receive its dues in a timely manner.

The dividend yield of the company stands at 3.72 per cent, which is quite good. With the requirement of huge funding from the power sector to meet its demand, REC is set to grow handsomely going ahead. The scrip is fairly priced, with its price-to-earnings multiple at 7.85x and the price-to-book value at 1.51x. We believe that the company will create wealth for shareholders who have a long-term investment horizon.