Rural Electrification

Transcription

1 BSE SENSEX S&P CNX 23,759 7,216 Bloomberg RECL IN Equity Shares (m) M.Cap. (INR b) / (USD b) 168.9/ Week Range (INR) 371 / 234 1, 6, 12 Rel. Per (%) -15/-18/-31 Avg Val,INRm 703 Free float (%) 39.4 Financials & Valuation (INR b) Y/E MAR 2016E 2017E 2018E NII PPP PAT EPS (INR) EPS Gr.% BV/Sh(INR) RoAA (%) RoE (%) Payout (%) Valuation P/E (x) P/BV (x) Div. Yld (%) February QFY16 Results Update Sector: Financials Rural Electrification CMP: INR171 TP: INR182 (+7%) Downgrade to Neutral Margins contract; GNPAs spike; Downgrade to Neutral RECL s 3QFY16 PAT was flat YoY and declined 15% QoQ to INR13.7b (12% miss) led by higher provisions and margins contractions. Abs. NPLs spiked 66% QoQ led to increase in provisions to INR3.6b (est. of INR 3.0b). Increase in NPLs also led to interest reversal resulting 26bp sequential decline in NIMs to 4.59%. Loan growth was up a healthy +20% YoY (4% QoQ) to INR2t led by the T&D segment, which grew +29% YoY and 7% QoQ. Loans to govt sector grew 24% YoY to INR1.73t 85% of the overall loan book. Asset quality deteriorated as absolute GNPAs spiked 66% to INR34.7b v/s INR20.9b in 2QFY16, %GNPAs increased 64bp to 1.71%. Outstanding restructured loans (RL) stood at INR200b at 10% of the total loan book, with 26% private sector loans under restructuring. Yields during the quarter declined by 18bp sequentially to 12.05% due to interest reversals on account of spike in NPAs. This resulted in NIM contraction of 26bp sequentially to 4.59%. Valuation and view: Amidst the underlying stress in the power segment, RECL managed to generate steady earnings CAGR of 25% over FY However, under the UDAY scheme, state governments would take over 75% of discom debt and gurantee the rest. While this would mitigate some asset quality concerns, but this would negatively impact earnings, as its yields would decline to 10.5% from existing ~12%. ROAs are likely to fall below 2% and ROEs to ~14% (down from 20%+ currently). While the stock trades at cheap valuation of 0.5x FY17 P/B, we are cutting our FY16/17 estimates by 8/23% to factor in lower yields and higher credit cost, we downgrade the stock to Neutral with a TP of INR182 (0.6x FY17BV). Quarterly Performance (INR Million) Y/E March FY15 FY16 FY15 FY16E 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE Interest Income 46,481 49,862 51,445 52,933 56,410 58,271 59,873 58, , ,250 Interest Expenses 27,523 29,545 30,449 30,930 33,064 35,166 37,066 34, , ,850 Net Interest Income 18,958 20,317 20,997 22,003 23,346 23,104 22,806 24,143 82,275 93,400 YoY Gr (%) Other Operational Income ,575 1,700 Net Operational Income 19,148 20,692 21,604 22,404 23,565 23,768 23,113 24,654 83,849 95,101 YoY Gr (%) Other Income ,585 1,712 Total Net Income 19,544 21,118 21,995 22,778 24,033 24,081 23,308 25,390 85,434 96,813 YoY Gr (%) Operating Expenses , ,426 3,134 4,029 YoY Gr (%) % to Income Operating Profit 18,961 20,536 21,482 21,321 23,207 23,246 22,367 23,964 82,300 92,784 YoY Gr % Provisions 1, ,907 4,731 1, ,572 6,670 8,030 12,764 PBT 17,749 20,356 19,575 16,590 21,242 22,688 18,795 17,295 74,270 80,020 YoY Gr (%) Tax 4,921 5,349 5,777 5,625 6,456 6,496 5,097 6,096 21,672 23,606 Tax Rate (%) PAT 12,828 15,008 13,798 10,965 14,786 16,192 13,699 11,198 52,599 56,414 YoY Gr (%) E:MOSL Estimates; Quarterly and annual numbers would not match due to differences in classification Sunesh Khanna (Sunesh.Khanna@MotilalOswal.com); Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com) / Harshvardhan Agrawal (Harshvardhan.Agrawal@MotilalOswal.com) Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Exhibit 1: Quarterly performance v/s our estimates and reasons for deviation (INR m) Y/E March 3QFY16A 3QFY16E Var (%) Comments Interest Income 59,873 60,601-1 Interest Expense 37,066 35,689 4 Net interest Income 22,806 24,912-8 Margins decline 26bp QoQ led by higher NPLs Other Operating Inc Other Income Total Net Income 23,308 25, Operating Expenses Operating Profit 22,367 24, Other Provisions 3,572 3, Spike in NPA led to higher provisions Profit before Tax 18,795 21, Tax Provisions 5,097 6, Tax rate at 27% Net Profit 13,699 15, Fall in margins and increase in provisions led to PAT miss Loan growth steady at 20% YoY; Disbursements grow 23% YoY Loan growth was up a healthy +20% YoY (4% QoQ) to INR2t led by the T&D segment, which grew +29% YoY and 7% QoQ. Loans to govt sector grew 24% YoY to INR1.73t 85% of the overall loan book. Sanctions for the quarter stood at INR121.8b down 35% YoY; whereas disbursements stood at INR119b grew 23% YoY. Absolute GNPA spikes 66% QoQ; Margins contract due to interest reversal Asset quality deteriorated during the quarter as absolute GNPA spiked 66% sequentially to INR34.7b v/s INR20.9b. This led to increase in %GNPA to 1.71% (v/s 1.07% in the last quarter). Two accounts (Essar Power MP and Starwire Vidyut) with exposure of INR13b+ slipped into NPA during the quarter. Outstanding restructured loans (RL) stood at INR200b at 10% of the total loan book; 26% private sector loans are under restructuring and remains an overhang on the asset quality. Higher GNPAs led to higher provisions during the quarter, which were at INR3.6b v/s INR1.9b in 3QFY15 and INR558m in last quarter. Yields during the quarter declined by 18bp sequentially to 12.05% due to interest reversals on account of spike in NPAs. This resulted in NIM contraction of 26bp sequentially to 4.59%. Incremental borrowing cost declined 65bp sequentially to 6.62% on back of over declining wholesale rates. Other highlights Borrowings from bonds continue to dominate RECL borrowings with 84% of loans coming from domestic bond. Foreign currency bonds form 15.6% and less than 1% from banks. Tax rate for the quarter stood at 27%. Company declared an interim dividend of INR12/share. 10 February

3 Valuation and view Amidst the underlying stress in the power segment, RECL has managed to generate steady earnings CAGR of +25% over FY09-FY15. However, under the UDAY (Ujwal Discom Assurance Yojana) scheme for financially distressed discoms, state governments would take over 75% of discom debt and guarantee the rest. While this would mitigate some asset quality concerns, but this would negatively impact earnings, as its yields would decline to ~10.5% from existing 12%. ROAs are likely to fall below 2% and ROEs to ~14% (down from 20%+ currently). Given the increasing acceptance of UDAY with four major states (Jharkhand, Chhattisgarh, Rajasthan and UP) already onboard, we expect more states to join soon that would impact RECL s earnings negatively. While the stock trades at cheap valuation of 0.5x FY17 P/B, we are cutting our FY16/17 estimates by 8/23% to factor in lower yields and higher credit cost, we downgrade the stock to Neutral with a TP of INR182 (0.6x FY17BV). Exhibit 2: Marginally increase earnings estimates for factor in better margins INR b Old Est. Revised Est. % Change FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 NII Other Income Total Income Op.Expenses Operating Profits Provisions PBT Tax PAT Margins (%) RoA (%) RoE (%) February

4 Story in charts Exhibit 3: Disbursements grew at 10% YoY Disbursements (INR b) YoY Gr (%) Exhibit 4: Loan growth healthy at +20% Loan Book (INR b) YoY Gr (%) QFY13 3QFY13 4QFY13 2QFY14 3QFY14 4QFY14 2QFY15 3QFY15 4QFY15 2QFY16 3QFY16 1HFY13 9MFY13 1,067 1,120 1,186 1,274 1,329 1,385 1,425 1,486 1,552 1,624 1,690 1,796 1,864 1,946 2,029 FY13 1HFY14 9MFY14 FY14 1HFY15 9MFY15 FY15 1HFY16 9MFY16 Exhibit 5: NIMs contract to 4.59% (%) Yield on loans Cost of funds NIM Exhibit 6: Loan mix remains fairly stable (%) Generation T & D Others QFY12 3QFY12 4QFY12 2QFY13 3QFY13 4QFY13 2QFY14 3QFY14 4QFY14 2QFY15 3QFY15 4QFY15 2QFY16 3QFY16 1QFY12 1HFY12 9MFY12 FY12 1HFY13 9MFY13 FY13 1HFY14 9MFY14 FY14 1HFY15 9MFY15 FY15 1HFY16 9MFY16 Exhibit 7: Loan Mix: Share of Govt. increased by 105bp YoY State Central PSUs Private Exhibit 8: 70% of inc. borrowings low cost bonds (%) 54EC Bonds Taxable bonds Banks & FIs FC Bor. & CP QFY12 1HFY12 9MFY12 FY12 1HFY13 9MFY13 FY13 1HFY14 9MFY14 FY14 1HFY15 9MFY15 FY15 1HFY16 9MFY HFY13 9MFY13 FY13 1HFY14 9MFY14 FY14 1HFY15 9MFY15 FY15 1HFY16 9MFY16 10 February

5 Exhibit 9: Quarterly snapshot FY14 FY15 FY16 Variation (%) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q QoQ YoY Profit and Loss (INR m) Net Interest Income 16,121 16,478 17,352 17,728 18,958 20,317 20,997 22,003 23,346 23,104 22, Operating Expenses , Employee Others , Operating Profits 16,362 16,536 17,519 17,947 18,961 20,536 21,482 21,321 23,207 23,246 22, Provisions ,475 1, ,907 4,731 1, , PBT 15,802 16,196 16,765 16,472 17,749 20,356 19,575 16,590 21,242 22,688 18, Taxes 4,343 5,088 4,484 4,560 4,921 5,349 5,777 5,625 6,456 6,496 5, PAT 11,459 11,108 12,281 11,912 12,828 15,008 13,798 10,965 14,786 16,192 13, Asset Quality GNPA 4,900 4,900 4,900 4,900 13,350 13,350 13,350 13,350 15,770 20,880 34, NNPA 3,780 3,780 3,530 3,530 10,920 10,920 10,920 9,700 11,870 16,470 27, Gross NPAs (%) Net NPAs (%) PCR (%) Ratios (%) Cost to Income Provision to operating profit Tax Rate Margins Reported (Quarterly; %) Yield on earning assets Cost of Funds Spreads NIMs Business Details (INR b) Sanctions Disbursements Loans 1,329 1,385 1,425 1,486 1,552 1,624 1,690 1,796 1,864 1,946 2, Borrowings 1,111 1,178 1,227 1,262 1,307 1,391 1,428 1,510 1,558 1,627 1, Sanctions discipline wise (%) Generation Trans & Dist Short term loans Disbursements discipline wise (%) Generation Trans & Dist Short term loans & Others Loans discipline wise (%) Generation Trans & Dist Short term loans and others Loans borrower wise (%) State Central PSUs Private Borrowing mix (%) Capital gains bonds Taxable Bonds Banks and Fis Foreign February

6 Exhibit 10: Valuation Metrics 66Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%) (INR) (USDb) FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 ICICIBC* Buy HDFCB Buy 1, AXSB Buy KMB* Neutral YES Buy IIB Buy DCBB Under Review FB Neutral JKBK Neutral SIB Buy Private Aggregate SBIN (cons)* Buy PNB Under Review BOI Neutral BOB Buy CBK Under Review UNBK Buy OBC Under Review INBK Buy CRPBK Neutral ANDB Buy IDBI Neutral DBNK Neutral Public Aggregate HDFC* Buy 1, LICHF Buy DEWH Buy IHFL Buy GRHF Buy REPCO Buy RECL Neutral POWF Neutral SHTF Buy MMFS Buy BAF Buy 6, ,620 1, MUTH Buy SKSM Buy NBFC Aggregate *Multiples adj. for value of key ventures/investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries Source: MOSL 10 February

7 Financials and valuations Income Statement (INR Million) Y/E March E 2017E 2018E Interest on Loans 81, , , , , , , ,263 Interest Exp and Other Charges 47,657 64,314 80, , , , , ,521 Net Financing Income 33,431 38,327 52,072 67,679 82,275 93,400 79,233 90,743 Change (%) Other Operating Income 1,481 1,597 2,464 2,116 1,575 1,700 1,956 2,249 Other Income 1, ,028 1,585 1,712 1,883 2,072 Net Income 36,443 40,777 55,149 70,823 85,434 96,813 83,071 95,063 Change (%) Employee Cost 1,275 1,710 1,518 1,299 1,339 1,540 1,771 1,984 Administrative Exp ,051 1,727 2,418 2,902 3,424 Depreciation Operating Income 34,768 38,452 52,946 68,431 82,300 92,784 78,323 89,580 Change (%) Total Provisions ,307 3,120 8,030 12,764 17,385 20,349 % to Operating Income PBT 34,766 37,930 51,640 65,311 74,270 80,020 60,938 69,231 Tax (Incl Deferred tax) 9,067 9,758 13,463 18,474 21,672 23,606 17,977 20,077 Tax Rate (%) PAT 25,699 28,171 38,176 46,837 52,599 56,414 42,962 49,154 Change (%) PAT (Incl DTL) 25,645 28,199 38,182 48,265 51,952 57,214 43,571 49,846 Change (%) Proposed Dividend 7,406 7,406 8,150 9,380 10,566 11,283 8,592 9,831 Balance Sheet (INR Million) Y/E March E 2017E 2018E Capital 9,875 9,875 9,875 9,875 9,875 9,875 9,875 9,875 Reserves & Surplus 117, , , , , , , ,938 Net Worth 127, , , , , , , ,813 Borrowings 700, ,565 1,077,910 1,262,400 1,510,240 1,829,524 2,135,821 2,470,943 Change (%) Total Liabilities 827,797 1,047,913 1,253,953 1,470,835 1,759,880 2,123,291 2,463,191 2,836,756 Investments 8,124 7,580 6,610 17,080 16,130 16,130 16,130 16,130 Change (%) Loans 821,321 1,013,620 1,272,660 1,485,040 1,792,820 2,127,354 2,483,513 2,906,991 Change (%) Net Fixed Assets ,059 Net current assets -2,529 25,933-26,117-32,105-49,880-21,084-37,432-87,424 Total Assets 827,797 1,047,913 1,253,953 1,470,835 1,759,880 2,123,291 2,463,191 2,836,756 E: MOSL Estimates 10 February

8 Financials and valuations Ratios Y/E March E 2017E 2018E Spreads Analysis (%) Avg. Yield - on Financing Portfolio Avg Cost of Funds Interest Spread Net Interest Margin Profitability Ratios (%) RoE RoA Efficiency Ratios (%) Int. Expended/Int.Earned Op. Exps./Net Income Empl. Cost/Op. Exps Asset-Liability Profile (%) Loans/Borrowings Ratio Debt/Equity Ratio Valuations Book Value (INR) BV Growth (%) Price-BV (x) OPS (INR) OPS Growth (%) Price-OP (x) EPS (INR) EPS Growth (%) Price-Earnings (x) Dividend Dividend Yield (%) E: MOSL Estimates 10 February

9 Corporate profile: Rural Electrification Corporation Company description Rural Electrification Corporation is a Government of India undertaking (owns: 60%) established with an objective to finance and promote rural electrification project all over the country. The company also provides financial assistance to SEBs, State Government Departments and Rural Electric Cooperatives for rural electrification projects. REC also provides loan assistance for investments in rural electrification schemes. REC s outstanding loan book as of is INR1.9t and a net worth of INR266b Exhibit 11: Sensex rebased Rural Elec.Corp. Sensex - Rebased 150 Feb-15 May-15 Aug-15 Nov-15 Feb-16 Exhibit 12: Shareholding pattern (%) Dec-15 Sep-15 Dec-14 Promoter DII FII Others Note: FII Includes depository receipts Exhibit 14: Top management Name Designation Rajeev Sharma CMD P J Thakkar Director (Tech) A K Agarwal Director (Finance) Vinod Behari Executive Director Exhibit 13: Top holders Holder Name % Holding LIC of India 7.5 DB International (Asia) Ltd 2.3 Exhibit 15: Directors Name Rajeev Sharma Dr. S K Gupta* B N Sharma Name P J Thakkar A K Agarwal *Independent Exhibit 16: Auditors Name P K Chopra & Co Raj Har Gopal & Co Chandrasekaran Associates Type Statutory Statutory Secretarial Audit Exhibit 17: MOSL forecast v/s consensus EPS (INR) MOSL forecast Consensus forecast Variation (%) FY FY FY February

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