REC looks attractive: PN Vijay

Rural Electrification Corporation (REC) is very attractively priced, says PN Vijay, Portfolio Manager.
Vijay told CNBC-TV18, "REC is a very good buy fundamentally. It could easily give you excellent returns. It is a government finance company. If you look at its borrowing profile, it gets about 90 percent of its money from tax free bonds and taxable bonds and a little bit of financing from financial institutions and banks. Its cost of capital is low, around 8-8.5 percent. Its disbursements are essentially to state and central government entities, more to central government entities, about 90 percent."

He further added, "Last quarter, it had very decent earnings. Both its top-line and bottom-line went up by about 25-30 percent. Its NPAs were very low at about 0.46% that is because most of the revenues, which are coming to REC, are escrowed. They are put into special bank account under letters of credit. Irrespective of the financial situation of the borrower, they get the money. The net interest margin was quite impressive at 4.5 percent. It is quite high compared to banks."
"Going forward, the big trigger for REC is the restructuring of the major state electricity boards. A lot of cash will come back to REC. The lingering fear of NPA will be a thing of the past. It will get institutionalised in the next two-three months. That should give a big trigger to both REC and PFC."
"It is trading around Rs 225. I am expecting earnings per share of about Rs 35 in 2012-13 based on current earnings. So, it is trading slightly below seven times earnings. Given the earnings growth, I think it's very attractively priced."
"It is a well run company with low NPAs and strong NIM. The only trigger risk factor is that there could be a delay in implementation of this power reform. That is unlikely. But if that happens, the stock may not move up the way I think it will."