Rural Electrification Corporation - ADD Maintained - ICICISecurities

Difficult times negotiated well

Reason for report: Updates from our Mumbai roadshow and earnings revision

We continue to retain our positive outlook on Rural Electrification Corporation (REC) post our roadshow in Mumbai with the top management yesterday. The management categorically stated that it would prefer maintaining a healthy asset quality rather than chase strong disbursement growth, a view we endorse and are comfortable with. Prospects of fructification of the current sanction pipeline (Rs1.5tn) into loans over the next three to five years seem brighter now. The management maintains a disbursement growth expectation of 15-20% over FY12-14. Given that improvements in the power sector, fuel supply and distribution reforms are progressing at a very slow pace, power sector financiers are bound to face asset quality headwinds. As per the REC management, the next couple of quarters are unlikely to see fresh NPA accretion. However, we retain our elevated credit costs over FY12-14E as we see real prospects of restructuring in the private as well as SEB segments. We maintain ADD on the stock, with a marginally revised target price of Rs232/share (owing to a 3.9% earnings upgrade for FY13E as discussed below).

Asset quality – further deterioration unlikely. For H1FY13, none of the private power projects appear critical and are therefore unlikely to slip into NPA. Large private power producers have refinanced some loans with REC, hence the risk stands reduced. Currently, interest and principal servicing for top private exposures are as per schedule. Rajasthan SEB's discom exposure stands at ~Rs80bn, which is entirely government guaranteed. There could be an application for restructuring by this SEB in the near future. REC would not take any NPV hit in that case. Other SEBs continue to service their principal and interest on time.

Growth/spread targets maintained; we retain our positive stance. We marginally increase our loan growth assumption for FY13 given higher comfort with disbursements from the current sanctions pipeline (Rs1.5tn). The liability mix is also set to tilt towards ECBs and refinancing of bank loans (~125bps higher cost than bonds). We pencil-in an expected ECB issuance of US$750mn in FY13E versus our earlier expectation of US$350mn. Together, the higher loan growth assumption and higher ECB raising lead to a 3.9% earnings upgrade for FY13E and a 2.8% upgrade for FY14E. Due to the earnings upgrade, our ABV multiple adjusts from ~1.3x to ~1.4x, which indicates a target price of Rs232/share and an upside of 6% from CMP. Maintain ADD.

Source : Equity Bulls

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