11th February, 2011 INR

Rural Electrification Corporation Ltd

Key Data `
Rural Electrification Corporation (REC) reported PAT of `6.6 billion, up by 40%
CMP 227
Target Price 298 on YoY basis. Healthy loan growth enabled strong growth in NII of 36%. Asset
Bloomberg Code RECL IN quality performance appears on track as indicated by low NPAs.
Reuters Code RURL.BO
BSE Code 532955 KEY HIGHLIGHTS FOR 3Q FY11:
NSE Code RECLTD

REC’s disbursements were flat YoY in 3QFY11 to `60 billion while sanctions
Face Value (`) 10
were at same levels as 3QFY10 at `106 billion in 3QFY11.
Market Cap (` Bn) 223
52 Week High (`) 410

Healthy loan growth of 20% enabled strong growth in Net Interest Income (NII)
52 Week Low (`) 205
of 36%. Asset quality performance remains strong as indicated by low NPAs at
Avg. Daily Volume (6m) 1835970
F&O 0.003%.
Market Lot 1000

During the 3QFY11, REC reported margins of 4.56% higher by 17 bps compared
Turnover (` Mn) 279
to the 2QFY11. Despite the general increase in the interest rates the cost of funds
Shareholding % have gone down mainly on account of the low cost foreign borrowings while the
Promoters 66.8
yields have moved up.
Mutual Funds / Bank/ FI 1.9
Foreign Institutional Investors 21.2

REC has increased the lending rates by 25 bps with effect from Jan 2011. Further
Insurance Companies 2.2
Bodies corporate/Individuals/others 7.9
they are expecting another 50 bps hike in the near term. The management
Total 100.0 therefore expects REC to maintain margins at around 3%.

REC maintains a capital adequacy is at 20.2% against the requirement of 15%.

Management is comfortable with taking leverage up to 9x from the current 5.0x.

Valuation and Recommendation

Considering the sanctions outstanding we expect REC to register strong growth in

disbursements. T&D disbursement though muted during this quarter the
management expects this to pick up in FY12. We have lowered our loan growth
estimates to factor in moderate pace of disbursement. We expect REC to register a
19% growth in its loan book during FY10-12. We expect earnings CAGR of REC
to be 13% for FY10-12 and the net interest income (NII) CAGR at 22%. With the
recent correction in the price, we recommend “BUY” on REC with a target of
`298. (2.0x PBV of `149.2 for FY12E).

Analyst
Deepti Chauhan
research@acm.co.in
Tel: +91-22 2858 3408

Rural Electrification Corporation Ltd – Result Update 1

ACMIIL
 Disbursement

REC’s disbursements were flat YoY and grew by mere 8.3% QoQ in 3QFY11 to
`60 billion while sanctions were also flat YoY and grew by mere 2% to `106
billion in 3QFY11. While generation disbursements grew by 20% YoY,
disbursements to the T&D space grew by 10%. Management attributed this decline
to delay in draw down of loans in the T&D projects. However, the management
expects demand to rebound strongly in FY12. The management expects
disbursements of ~`280 billion for FY12.

Loan Book

The loan book of REC has registered a 21% YoY growth to `757 billion in
3QFY11. During the quarter T&D loans dominate the loan book, however the share
with strong demand being witnessed by REC from the generation sector, the share
of this segment is rising in total loan book. The share of private sector has also been
maintained at 7%. On account of the moderate growth in disbursements, we have
revised our loan book forecast and we expect the loan book to grow from `659
billion in FY10 to `936 billion in FY12 thereby registering a 19% CAGR.

Borrowing profile

Borrowing Profile

7% 7% 9% 7%
120% 8%

18% 19% 18% 18% 17%

80%

%
54% 55% 56% 56% 59%
40%

22% 18% 19% 17% 17%

0%
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11

Capital Gains Bonds Taxable Bonds Banks, FI Others

Source: Company

REC raised `64 billion of funds during 3QFY11 of which 59% have been raised
from banks and financial institutions with average cost of funds being 8.52%,
17.4% through taxable bonds carrying an average cost of 8.65%, 6% of funds have
been raised in from of foreign currency loan carrying an average cost of 3%.
Despite the interest rates hikes, the average cost of borrowings for REC has gone
down from 7.96% in 2QFY11 to 7.8% in 3QFY11. This is mainly on account of the

Rural Electrification Corporation Ltd – Result Update 2

ACMIIL
 lower cost foreign borrowings. 80% of the liabilities are fixed for REC on which
the interest rates are lower. Going forward as well the management intends to
maintain lower cost.

Asset quality remains strong

REC’s asset quality remains robust with net NPAs below 1%. Gross NPA has been
maintained at 0.03% as on 3QFY11 has Net NPA has also been maintained at
0.003%.

Net Interest Margins

During the 3QFY11, REC reported margins of 4.56% higher by 17 bps compared to
the 2QFY11. Despite the general increase in the interest rates the cost of funds have
gone down mainly on account of the low cost foreign borrowings while the yields
have moved up. Going forward as well, in a rising interest rate environment, the
company intends to resort to foreign borrowings with a view to reduce its cost of
funds as the cost of these funds is 100bps lower than the domestic funds. The
management has also increased the lending rates by 25 bps with effect from Jan
2001. We expect margins to be at 4.5% in FY11 and 4.4% in FY12.

Valuation and Recommendation

Considering the sanctions outstanding we expect REC to register strong growth in

disbursements. T&D disbursement though muted during this quarter the
management expects this to pick up in FY12. We have lowered our loan growth
estimates to factor in moderate pace of disbursement. We expect REC to register a
19% growth in its loan book during FY10-12. We expect earnings CAGR of REC
to be 13% for FY10-12 and the net interest income (NII) CAGR at 22%. With the
recent correction in the price, we recommend “BUY” on REC with a target of
`298. (2.0x PBV of `149.2 for FY12E).
Interim Results (` Mn) 3QFY11 3QFY10 % Chng 9MFY11 9MFY10 % Chng
Interest Income 20859.8 16532.0 59507.2 46,349.9
Interest expended 12379.7 10278.5 35467.6 28,426.6
Net Interest Income 8480.1 6253.5 35.6 24039.6 17923.3 34.1
Other Income 920.6 529.8 2382.1 2030.4
Operating Income 9400.7 6783.3 26421.7 19953.7
Operating Expenses 386.2 338.1 1114.9 990.8
Profit before Taxes 9014.5 6445.2 25306.8 18962.9
Provisions for taxes 2373.6 1,704.50 6610.2 4,560.40
Net Profit 6640.9 4740.7 40.1 18696.6 14402.5 29.8
Equity Share capital 9874.6 8586.6 9874.6 8586.6
EPS 6.7 5.5 18.9 16.8
Source: Company

Rural Electrification Corporation Ltd – Result Update 3

ACMIIL
 Earnings Summary ` Mn
Particulars FY09 FY10 FY11E FY12E
Interest Income 46,649.3 64,308.5 81,002.0 98,019.6
Interest expended 28,873.5 38,960.7 48,287.3 60,022.1
Net Interest Income 17,775.8 25,347.8 32,714.6 37,997.5
Fee Income 832.5 1,010.6 1,627.2 1,813.2
Other Income 1,830.9 1,756.9 2,055.4 2,281.2
Operating Income 20,439.2 28,115.3 36,397.2 42,091.8
Operating Expenses 1,207.8 1,620.1 1,615.1 1,881.2
Pre Provisioning Profits 19,231.4 26,495.2 34,782.1 40,210.7
Provisions & contingencies 34.2 2.2 21.7 24.0
Profit before Taxes and Prior period items 19,197.2 26,493.0 34,760.4 40,186.7
Prior period items 3.9 -1.1 0.0 0.0
Profit before Taxes 19,201.0 26,491.9 34,760.4 40,186.7
Provisions for taxes 6,480.3 6,477.8 9,042.8 10,453.6
Net Profit 12,720.7 20,014.1 25,717.6 29,733.0
Source: Company, ACMIIL research

Sources and Application of Funds ` Mn

Particulars FY09 FY10 FY11E FY12E
Liabilities
Capital 8,586.6 9,874.6 9,874.6 9,874.6
Reserves & Surplus 53,314.1 100,928.8 118,538.2 137,489.0
Networth 61,900.7 110,803.4 128,412.8 147,363.6
Borrowings 449,359.6 559,482.3 652,184.0 788,444.4
Deferred Tax Liability 9,566.9 -73.7 -68.6 -63.5
Total 520,827.2 670,212.0 780,528.3 935,744.6
Assets
Fixed assets 809.0 899.1 1,044.7 1,220.9
Investments 10,048.6 9,098.6 8,850.0 8,850.0
Loans 513,814.5 664,526.1 782,460.3 936,215.4
Net Current Assets -3,844.9 -4,311.9 -11,826.7 -10,541.6
Total 520,827.2 670,212.0 780,528.3 935,744.6
Source: Company, ACMIIL research

Rural Electrification Corporation Ltd – Result Update 4

ACMIIL
 Key Ratios FY09 FY10 FY11E FY12E
Spreads
Cost of Borrowings 7.4% 7.7% 8.0% 8.3%
Yield on Advances 10.5% 11.0% 11.2% 11.4%
Net Interest Income 3.1% 3.3% 3.3% 3.1%
Net interest margins 4.0% 4.3% 4.5% 4.4%
Profitability ratios
Return On Average Assets (ROAA) 2.7% 3.9% 3.5% 3.5%
Return On Average Net worth (ROANW) 22.0% 26.9% 21.5% 21.6%
Balance sheet ratios
Loan to borrowings ratio (%) 114.3 118.8 120.0 118.7
Debt/Equity Ratio (Times) 7.3 5.0 5.1 5.4
Growth Ratios
Borrowings 31.1% 24.5% 16.6% 20.9%
Loans 30.7% 29.3% 17.7% 19.7%
NII Growth 35.9% 42.6% 29.1% 16.1%
Book value 20.2% 56.2% 15.9% 14.8%
EPS 47.9% 59.1% 10.5% 15.6%
Valuation ratios
EPS (Rs.) 14.8 23.6 26.0 30.1
Book value (Rs.) 71.8 112.2 130.0 149.2
P/E (X) 20.1 12.7 11.5 9.9
P/BV (X) 4.2 2.7 2.3 2.0
Source: Company, ACMIIL research

Rural Electrification Corporation Ltd – Result Update 5

ACMIIL
 Notes

Institutional Sales:
Ravindra Nath, Tel: +91 22 2858 3400
Kirti Bagri, Tel: +91 22 2858 3731
K.Subramanyam, Tel: +91 22 2858 3739
Email: instsales@acm.co.in

Institutional Dealing:

Email: instdealing@acm.co.in

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Rural Electrification Corporation Ltd – Result Update 6

ACMIIL