Rural Electrification Corporation: Recommendation Review

Through the past couple of years, the power sector has remained extremely volatile with a downward bias. The companies have been facing various kinds of headwinds, and this has impacted their fundamentals very badly.

A fallout of this has been an adverse impact on the fortunes of Rural Electrification Corporation (REC), a company engaged in the long-term financing of power projects. We had recommended REC in DSIJ Vol. 27, Issue No. 9 (dated 22nd April, 2012), when it was trading at Rs 227 per share. Our recommendation was based on expectations of a tariff hike by the state electricity boards, which would help the company receive its dues in a timely manner. Further, huge funding opportunity in the power sector was expected to result in good business growth. Also, the company had sound fundamentals, which had made it look like a good buying opportunity.

Since we recommended it, the scrip has actually moved southwards to touch the levels of Rs 158. At that point, we had asked you to hold on to the scrip based on our conviction in the company. As per our expectations, the scrip soon caught on to a positive momentum moving higher and is currently trading at Rs 242 per share. In view of the volatile market conditions, we would advise investors to book profits, which would give them a fair return of 6.6 per cent from where we had recommended the scrip. In additional to the capital appreciation, investors would also have received a dividend of Rs 2.50 per share, which is tax-free income.

REC is the first public financial institution which focusses exclusively on financing the Indian power sector. For the September quarter of 2012, its topline grew by 30 per cent to Rs 3291 crore and the bottomline grew at a robust rate of 53 per cent to Rs 953 crore. Since the counter is a highly volatile one, in the present market conditions, one should get out of the scrip rather than hold on to it as it is providing decent returns.