Buy Rural Electri Corp; target of Rs 310: Motilal Oswal

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Buy Rural Electri Corp; target of Rs 310: Motilal Oswal

Motilal Oswal is bullish on Rural Electrification Corporation and has recommended buy rating on the stock with a target of Rs 310 in its August 10, 2011 research report.

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Motilal Oswal is bullish on Rural Electrification Corporation and has recommended buy rating on the stock with a target of Rs 310 in its August 10, 2011 research report.

"Rural Electrification Corp's (RECL) 1QFY12 PAT grew 12.6% YoY to INR6.6b, in line with our estimate. NII grew 17.3% YoY to INR9.1b, 5% higher than our estimates due to strong loan growth (24% YoY) and sequentially stable margins. However, provisions spiked up to INR250m against our estimate of INR5m, shaving off benefits of higher than expected NII growth."

"Reported NIM was sequentially stable at 4.34%, despite one-offs of INR360m (income reversal of INR250m and oneoff interest expense of INR110m) in 1QFY12, which is commendable. Meanwhile reported spreads contracted by 10bp QoQ to 3.1%. Adjusting for the one offs, spreads and NIM could have been 3.25% and 4.47% respectively. Sanctions for 1QFY12 declined by 7.4% YoY to INR212b while disbursements increased 18% YoY to INR55b. Sanctions and disbursements declined sequentially by 6% and 34% respectively. Loan book grew 24% YoY and 5% QoQ to INR858b. RECL recognized exposure of INR 2.5b to one of the hydro projects as NPA, which led to (1) NII being lower by INR250m (2) provision of INR250m and (3) increase in GNPA ratio to 0.3% v/s 0.02% a quarter earlier."

"With a strong sanctions pipeline (INR1.6t), loan growth is likely to be healthy at 22% CAGR over FY11-13. On the asset front, rising SEB losses are driving up the risk quotient, more so for REC given its higher exposure to the T&D segment. However the government's continued thrust on power sector reforms, recourse to SEB collections through an escrow mechanism and initiatives taken by SEBs to stem the strain on cash flows provide some comfort. While we expect RoA to decline by ~30bp over FY11-13 owing to margin compression and building in some credit cost, RoE will be strong at 21-22% as REC leverages its capital. Maintain Buy," says Motilal Oswal research report.

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To read the full report click on the attachment