Buy Rural Electrification Corporation Ltd - Motilal Oswal

Rural Electrification Corp's (RECL) 3QFY12 PAT grew 16% YoY and 24% QoQ to INR7.7b (15% higher than estimates), helped by a forex gain of INR866m. Loan growth remained healthy at 25% YoY but reported margins contracted 13bp QoQ. Asset quality deteriorated with one large power project being classified as NPA.

Key highlights:

NII grew 18.5% YoY and 5.8% QoQ to INR10b; in line with our estimates. However, reported NIM contracted 13bp sequentially to 4.34% mainly on account of reversal in interest income to the tune of ~INR220m (due to a large power project being classified as non-performing), which impacted yield on loans.

Loans grew 25% YoY and 5% QoQ to INR950b. The overall loan mix remained fairly stable. Exposure to private sector continued to inch up steadily, rising to 12% v/s 11.2% in 2QFY12 and 9.1% in 3QFY11.

RECL booked forex gain of INR866m (v/s estimates of a forex loss of INR1b) due to change in accounting treatment for foreign currency translation difference. Had the company followed the old accounting method, the 9MFY12. PAT would have been lower by INR1.97b.

Asset quality deteriorated with GNPAs increasing to INR4.9b from INR2.7b in 2QFY12, on account of one large gas based power project being classified as NPA. RECL's exposure to this project stood at INR2.2b.

Valuation and view: We fine tune our earnings estimates and expect earnings CAGR of 16%, with average RoAs of ~3% over FY12/13. While we expect RoA to decline ~25bp over FY11-FY13 owing to a compression in NIMs, RoE would continue to remain strong at 21-22% as REC leverages its capital. Stock trades at 1.1x FY13E BV. Buy.

Source : Equity Bulls

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