REC - Stable growth, higher NIM; Buy - Anand Rathi

Robust loan growth, higher disbursements. Rural Electrification Corp.'s (REC) loan book grew 25% yoy (6.0% qoq), to Rs.1,187bn, led by healthy disbursements growth of 64% yoy (37% qoq) to Rs.104bn. Sanctions pipeline in the quarter improved 46% yoy to Rs.128bn, driven by higher sanctions in the transmission and distribution space. Share of state governments in overall loan book has increased 80bps yoy to 82.6%.

Higher NIM on better yields, productivity up. Reported NIM grew 26bps qoq, led by 24bps rise in yield on earning assets to 12.14%, further aided by 4bps qoq fall in cost of funds to 8.36%. A dynamic borrowing mix, coupled with easing liquidity, could further benefit NIM. Productivity further improved with cost-income at 3.5% against 6.8% a year ago.

Asset quality stable; medium-term risks persist. REC's asset quality remained stable, with no addition to delinquencies in the quarter. While NPA coverage increased to 18%, it remains lower than other NBFCs. The SEB restructuring package augurs well for the company's financial health. However, increasing incremental share of private sector projects may pose asset quality concerns in the medium term. As a result, we have built higher provision of 22bps over FY13-15 against 6bps in FY12.

Our take. We increase our PAT estimates 3.4% and 5.6% for FY14 and FY15, respectively, on higher NIM assumptions. We raise our target price to Rs.289 from Rs.270 and value the NBFC at 1.4x FY14e BV on higher RoEs (earlier 1.3x FY14). With strong niche expertise and domain knowledge, we believe risk-reward favors REC at current valuations of 1.2x FY14 BV. We re-iterate Buy. At our Mar'14 target, the stock would trade at PABV of 1.4x FY14e and 1.2x FY15. Our target is based on two-stage DDM (CoE: 14.6%; beta: 0.9; Rf: 8%).

Risks. Slowdown in the power sector, regulatory hurdles.

Source : Equity Bulls

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