BUY RURAL ELECTRIFICATION CORPORATION LTD. CMP Target Price NOVEMBER 27 th 2013 SYNOPSIS. Result Update: Q2 FY14 ISIN: INE020B01018

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1 BUY CMP Target Price RURAL ELECTRIFICATION CORPORATION LTD Result Update: Q2 FY14 NOVEMBER 27 th 2013 ISIN: INE020B01018 Index Details Stock Data Sector Finance(NBFC) BSE Code Face Value wk. High / Low (Rs.) / Volume (2wk. Avg. Q.) Market Cap (Rs. in mn.) Annual Estimated Results (A*: Actual / E*: Estimated) YEARS FY13A FY14E FY15E Net Sales EBITDA Net Profit EPS P/E Shareholding Pattern (%) 1 Year Comparative Graph RURAL ELECTRIFICATION CORPORATION LTD BSE SENSEX SYNOPSIS Rural Electrification Corporation Ltd (REC) is one of the leading public financial institutions in the country, funding almost all needs of entire Power Infrastructure space. During the quarter, net profit increased by 16.43% of Rs million against Rs million in the corresponding quarter of the previous year. The company s Total Income increased by 27.48% from Rs millions in Q2 FY13 to Rs millions in Q2 FY14. Total Assets increased by 23% from Rs millions to Rs millions and Net worth increased by 16% from Rs millions to Rs millions. EBITDA of the company has increased by 24.75% to Rs millions in Q2 FY14 from Rs millions in Q2 FY13. Sanctions during the 2 nd quarter of FY14 were RS millions as against Rs millions in the corresponding previous quarter. During Q2 FY14, Disbursements increased by 8% to Rs millions from Rs millions in Q2 FY13. Net Sales and PAT of the company are expected to grow at a CAGR of 23% and 23% over 2012 to 2015E respectively. PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%) REC Ltd Power Finance Co. Ltd IDFC Ltd Bajaj Finserv Ltd

2 Recommendation & Analysis - BUY Rural Electrification Corporation Ltd (REC) is one of the leading public financial institutions in the country, funding almost all needs of entire Power Infrastructure space. Total Income of the company was at Rs million in Q2 FY14 from Rs millions in Q2 FY13. During the quarter ended Q2 FY14, net profit of the company was up by 16.43% at Rs million against Rs million and EBITDA has increased by 24.75% at Rs million from Rs million in the corresponding quarter of the previous year. During the 2 nd quarter, the company sanctions Rs millions as against Rs millions in the corresponding previous quarter in the form of short term loan by 2%, Transmission And Distribution (Including RGGVY) 41%by and for Generation 57% and Disbursements increased by 8% from Rs millions to Rs millions During H1 FY14, the company s net sale was at Rs millions compared to Rs millions for half year ended H1 FY13. Profit after tax is Rs millions as against Rs millions for half year ended 30 th September REC Strives to strengthen its core financing activities and explore new business areas in the allied fields also vizpower equipment financing, energy efficiency related activities, equity financing etc. The company is planning to enhance its presence in the Green energy financing, such as solar, biomass and wind power, which shall help in mitigating the problem of power scarcity, carbon emissions and fuel supply. The company reviews and revises its lending and operational policies or producers to suitability align with market requirements. REC s Total Assets increased by 23% from Rs millions to Rs millions and Net worth increased by 16% from Rs millions tors millions. The company strives to sustain and maintain consistent growth rate and surge ahead to attain still greater heights of performance to match the expectations of all its stakeholders. We expect the company to post a CAGR of 23% and 23% in its top-line and bottom-line respectively. Hence, we recommend BUY for Rural Electrification Corporation Ltd with a target price of Rs on the stock.

3 QUARTERLY HIGHLIGHTS (STANDALONE) Results updates- Q2 FY14, Rural Electrification Corporation Limited provides loan assistance to SEBs/State Power Utilities for investments in rural electrification schemes through its Corporate Office located at New Delhi. The company work towards fulfilling power sector borrowers requirements and has reported its financial results for the quarter ended 30 SEPTEMBER, Months SEP-13 SEP-12 % Change Net Sales % PAT % EPS % EBITDA % The company has achieved a turnover of Rs million for the 2 nd quarter of the current year as against Rs millions in the corresponding quarter of the previous year. The company has reported an EBITDA of Rs millions an increased by 24.75% and a net profit of Rs million against Rs million reported respectively in the corresponding quarter of the previous year. The company has reported an EPS of Rs for the 2 nd quarter as against an EPS of Rs in the corresponding quarter of the previous year. Break up of Expenditure During the quarter, Total Expenditure raised by 149 per cent mainly on account of Foreign exchange fluctuation and Contingent Allowance for standard loan Assets with other expenses in the rupee impact, when compare to previous quarter Q2 FY13. Total expenditure in Q2 FY14 was at Rs million as against Rs million in Q2FY13. Break up of Expenditure Rs. In millions Q2 FY14 Q2 FY13 Foreign exchange fluctuation loss Employee Benefits Expenses Depreciation & Amortization Expense Other Expenses Contingent Allowance for standard loan Assets

4 Latest Updates Total Assets increased by 23% from Rs millions to Rs millions and Net worth increased by 16% from Rs millions tors millions. Outstanding Borrowings increased by 24% from Rs millions tors millions. Total Income increased by 27.48% from Rs millions in Q2 FY13 to Rs millions in Q2 FY14. Rural Electrification Corporation Ltd has reported that the Public Issue of Tax Free Secured Redeemable Non-convertible Bonds, in the nature of Debentures of REC was opened on August 30, 2013 for subscription and was scheduled to close on September 23, 2013 for an amount of Rs Crores with an option to retain over subscription upto Rs Crores aggregating upto Rs Crores. Business During the 2 nd quarter of FY14, the company Sanctioned Rs millions as against Rs millions in the corresponding previous quarter. SHORT TERM LOAN: During the quarter, the company Sanctioned 2% of short term loans of Rs millions in Q2 FY14 against Rs millions in Q2 FY13. GENERATION: The company Sanctioned 57% from the total amount sanctioned, during the quarter of Rs millions against Rs millions in the corresponding quarter of previous year. TRANSMISSION AND DISTRIBUTION (including RGGVY): So to strengthen and improve the transmission, sub transmission and distribution system in the designated area & also lines for power evacuation. REC sanctioned 41% from the total amount of RS Disbursements increased by 8% from Rs millions to Rs millions. During the quarter, Disbursements in Generation were 47% whereas disbursements in T & D (including RGGVY) by 51% and short term loan by 2% from the total amount disbursements

5 COMPANY PROFILE Rural Electrification Corporation Limited (REC), a NAVRATNA Central Public Sector Enterprise under Ministry of Power, was incorporated on July 25, 1969 under the Companies Act REC is a listed Public Sector Enterprise Government of India with a net worth of Rs mn as on Its main objective is to finance and promote rural electrification projects all over the country. It provides financial assistance to State Electricity Boards, State Government Departments and Rural Electric Cooperatives for rural electrification projects as are sponsored by them. REC provides loan assistance to SEBs/State Power Utilities for investments in rural electrification schemes through its Corporate Office located at New Delhi and 20 field units (Project Offices), which are located in most of the States. Rec, shall work towards fulfilling power sector borrowers requirements and by mobilizing funds from various sources at lowest possible cost and strive to improve customers satisfaction on continual basis The Project Offices in the States coordinate the programmes of REC s financing with the concerned SEBs/State Power Utilities and facilitate in formulation of schemes, loan sanction and disbursement and implementation of schemes by the concerned SEBs/State Power Utilities. Projects Generation-Conventional Generation-Renewable Transmission & Distribution International Co-operation & development SCHEMES FINANCED BY REC CATEGORY Project Intensive Electrification: P:IE To cover intensive load development for providing connections to rural consumers in already electrified areas Project Pumpsets: SPA:PE Aims at energisation of pump sets Project system Improvement: P:SI To strengthen and improve the transmission, sub transmission and distribution system in the designated area & also lines for power evacuation.

6 SI: Meters, Transformers, Conductors, capacitors etc. (Bulk loan) Used For procurement and installation of meters, transformers and capacitors etc. Short Term Loan To provide finance to the Power Utilities and State Governments to meet their working capital requirement for different purposes, such as purchase of fuel for power plant, purchase of power, purchase of material and minor equipment, system and network maintenance including transformer repairs, etc. Debt Refinancing The Scheme aims to facilitate reduction of the cost of borrowings of State Power Utilities/highly rated private power utilities by repaying their high cost term loans raised from other Banks/Financial Institutions for eligible projects/schemes. Financing Equipment manufacturers To provide Short term Loan/Medium term loan to the manufacturers of Power/Electrical material for power project. RE Cooperatives Development of rural electric cooperative societies Generation To provide term loan to State/ Central Sector/ Private Sector Companies for Generation projects covering all types of schemes/categories irrespective of nature, size and source of generation. Subsidiary Companies Raichur Sholapur Transmission Co. Ltd. REC Power Distribution Co. Ltd. REC Transmission Projects Co. Ltd Vizag Transmission Ltd. Nellore Transmission Ltd. Unchahar Transmission Ltd. Kudgi Transmission Ltd.

7 FINANCIAL HIGHLIGHT (STANDALONE) (A*- Actual, E* -Estimations & Rs. In Millions) Balance Sheet as at March31, E 2012A 2013A 2014E 2015E I. EQUITY AND LIABILITIES: A) Shareholders Funds: a) Share Capital b) Reserves and Surplus Sub-Total Net worth B) Non-Current Liabilities: a) Long-term borrowings b) Deferred Tax Liabilities [Net] c) Other Long Term Liabilities d) Long Term Provisions C) Current Liabilities: Sub-Total Long term liabilities a) Short-term borrowings b) Other Current Liabilities c) Short Term Provisions Sub-Total Current Liabilities TOTAL EQUITY AND LIABILITIES (A + B + C) II. ASSETS: D) Non-Current Assets: a) Fixed Assets: i. Tangible Assets ii. Intangible Assets iii. Capital work-in-progress iv. Intangible Asset under Development b) Deferred tax assets c) other non-current assets d) Non Current Investments e) Long Term Loans and Advances E) Current Assets: Sub-Total Non-Current Assets a) Current Investments b) Cash and Bank Balances c) Short Term Loans and Advances d) Other Current Assets Sub-Total Current Assets TOTAL ASSETS (D + E)

8 Annual Profit & Loss Statement for the period of 2012 to 2015E Value(Rs.in.mn) FY12A FY13A FY14E FY15E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Depreciation Profit Before Tax Tax Net Profit Equity capital Reserves Face value EPS Quarterly Profit & Loss Statement for the period of 31 MARCH, 2013 to 31 DEC, 2013E Value(Rs.in.mn) 31-Mar June Sep Dec-13E Description 3m 3m 3m 3m Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Depreciation Profit Before Tax Tax Net Profit Equity capital Face value EPS

9 Ratio Analysis Particulars FY12A FY13A FY14E FY15E EPS (Rs.) EBITDA Margin (%) PBT Margin (%) PAT Margin (%) P/E Ratio (x) ROE (%) ROCE (%) Debt Equity Ratio EV/EBITDA (x) Book Value (Rs.) P/BV Charts

10 OUTLOOK AND CONCLUSION At the current market price of Rs , the stock P/E ratio is at 4.88 x FY14E and 4.22 x FY15E respectively. Earning per share (EPS) of the company for the earnings for FY14E and FY15E is seen at Rs and Rs respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 23% and 23% over 2012 to 2015E respectively. On the basis of EV/EBITDA, the stock trades at 6.47 x for FY14E and 5.81 x for FY15E. Price to Book Value of the stock is expected to be at 1.00 x and 0.81 x respectively for FY14E and FY15E. We expect that the company surplus scenario is likely to continue for the next three years, will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment.

11 INDUSTRY OVERVIEW Indian financial services industry has been through the toughest of the times and yet stands strong and robust among the world economies. Having a deep impact of the far-reaching changes in the Indian economy since liberalization, the new face of this industry is evolving in a strong, transparent and resilient system. Over the last few years, financial markets have witnessed a significant broadening and deepening of service baskets with the introduction of several new instruments and products in banking, insurance and capital markets space. The sector was opened up to new private players including foreign companies who embraced international best practices and modern technology to offer a more sophisticated range of financial services to corporate, retail and institutional customers. Financial sector regulators too have been visionaries to ensure that new regulations and guidelines are in tandem with global norms. These developments have given a robust boost to the development and modernization of the financial services sector in India. Mutual Funds Industry in India India s asset management companies (AMCs) have witnessed growth of 0.7 per cent in August 2013 wherein their average assets under management (AUM) stood at Rs 7.66 lakh crore (US$ billion). Private Equity, Mergers & Acquisitions in India Private equity (PE) and venture capital (VC) firms remained bullish about India s consumer goods and services sector. PE and VC investments increased by more than 46 per cent in the first half of FY14, with consumer companies in retail, e-commerce, consumer packaged goods and quick service restaurants raising US$ million through 51 deals. Meanwhile, Indian merger and acquisition (M&A) space witnessed substantial levels of deal activity in the first nine months of There happened 377 deals amounting to US$ 23.9 billion. Foreign Institutional Investors (FIIs) in India Investments in Indian markets (equity, debt and derivatives) through participatory notes (P-Notes) increased to US$ billion by the end of July 2013, according to the data released by Securities and Exchange Board of India (SEBI). P-Notes allow high net-worth individuals (HNI), hedge funds and other foreign institutions to invest in Indian markets through registered FIIs. The FIIs investments through P-Notes registered a growth of per cent in July 2013 as compared to per cent in June 2013.

12 Overseas investors infused more than US$ 2 billion in the Indian stock market in the month of September Since the beginning of 2013, they have pumped a net US$ 13.7 billion in equities. Moreover, given the higher yields offered by Government and corporate debt, the FIIs have been aggressively buying bonds since the beginning of The debt market attracted a net inflow of about Rs millions (US$ 4.08 billion) in January-May As of October 4, the number of registered FIIs in the country stood at 1, 744 and the total number of subaccounts at 6, 358. Financial Services in India: Recent Developments Bangalore-based online retailer Flipkart has raised US$ 200 million from its existing investors including South African technology company Naspers Group and private equity (PE) firms Accel Partners and Tiger Global. The investors have already placed investments to the tune of US$ 181 million in the Indian e- commerce company and this fifth round of funding has marked the single-largest round of investment infusion. The funds would be used to build technology and will help the company strengthen its supply chain and human resource base. Private lender HDFC Bank is planning to launch 500 mini branches, to be handled by one to three people, across India by the end of FY14. The bank has added about 219 mini branches pan-india since The basic motive behind such an initiative by the bank is to take the formal banking experience to people in unbanked and under-banked areas. A mini branch, manned by one, two or three persons, offers the entire range of products and services including savings and current accounts, fixed deposits, recurring deposits, credit card, instant debit card and also ATM facility. Products such as two wheeler loan, tractor loan, commercial vehicle loan, agricultural and commodities loan among others are also offered. Financial Services: Government Initiatives In order to attract more of foreign capital to Indian markets, SEBI has eased norms for overseas investors in the debt category. As per the new rulings, FIIs will be allowed to buy Government securities (Gilts) directly from the market, rather than from the monthly auction conducted by the regulator to allocate these papers. The move is expected to facilitate more dollar inflows into the country besides making the cost of acquisition of gilts cheaper for foreign investors. In a similar initiative taken earlier in 2013, SEBI had allowed FIIs to buy corporate debt (which were also allocated through auction previously).

13 Road Ahead A report prepared by KPMG prepared in association with the Confederation of Indian Industry (CII) states that the Indian banking sector is expected to become fifth largest in the world by The report highlights that India is one of the top 10 economies of the world and with relatively lower domestic credit to gross domestic product (GDP) percentage, their lies a huge scope of growth for the banking sector. Bank credit is expected to grow at a compounded annual growth rate (CAGR) of 17 per cent in the medium term, eventually leading to higher credit penetration in the economy. Meanwhile, IRDA estimates that the insurance business in India would touch Rs 4 lakh crore (US$ billion) by the end of FY14. The regulator is considering bringing out norms for sub-brokers of insurance products as well. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

14 Firstcall India Equity Research: C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods Ashish.Kushwaha IT, Consumer Durable & Banking B. Anil Kumar Diversified Suhani Adilabadkar Diversified M. Vinayak Rao Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s,takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. For Further Details Contact: 3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai Tel. : / / Telefax : info@firstcallindiaequity.com