Buy Rural Electrification Corporation - Motilal Oswal

• Mkt Cap USD5.5b
• CMP Rs298
• Buy

Rural Electrification Corporation's (REC) 1QFY11 PAT grew 25% YoY to Rs5.9b driven by (1) 35% growth in NII, and (2) 30% YoY loan growth. Sanctions for the quarter grew 51% YoY to Rs228b. 1QFY11 PAT included a Rs260m tax write back and a Rs180m reversal of amortization expenses. Adjusted for this, PAT growth would have been 36% YoY. Key highlights include:
- 1QFY11 sanctions grew 51% to Rs228b and disbursements increased 28% YoY to Rs46.1b. Disbursement to the generation segment increased 63% YoY. Outstanding loan book grew ~28% to Rs697.9b (including interest accrued).

- Spreads for 1QFY11 were sequentially stable at 3.4% and NIMs improved 14bp to 4.6% led by utilization of float money received on equity issuance.

- In FY11, upward resets on loans of Rs100b, ~14% of loan book would offset pressure of the rising cost of funds.

- Asset quality is strong with GNPA of Rs200m (0.03%) and NNPA of Rs20m (nil).

Strong earning visibility; maintain Buy: Loan growth visibility of over 28% over three years (undisbursed sanctions are more than Rs1t v/s current loan book of Rs692b) would mean earnings growth of over 25% are sustainable over FY10-12 despite assumed pressure on spreads. We expect EPS CAGR of ~26% over FY10-12. EPS would be Rs26 in FY11 and Rs32 in FY12. We expect BV of Rs128 in FY11 and Rs149 in FY12. The stock trades at 9.3x FY12E EPS and 2x FY12E BV. Sustainable RoEs of over 20%, strong loan growth and superior asset quality imply valuation will be at a premium. We revise our target price to Rs340 (2.3x FY12E BV). Maintain Buy.

Source : Equity Bulls

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