Buy Rural Electrification Corporation; target of Rs 154: Edelweiss

Edelweiss's research report on Rural Electrification Corporation

Rural Electrification Corporation’s (REC) Q4FY18 earnings were impacted by conservative application of RBI’s reclassification norm (additional slippage of INR96bn). Encouragingly, upgrades have crystallised during the quarter (INR70bn from state restructured book); consequently, stress pool (NNPL + restructured) fell to 8.3% (11.5% in Q3FY18)—a trend, management believes, will sustain.

Outlook

Despite NIMs pressure, as incremental spreads are lower with structural improvement across the power value chain, REC entails potential to deliver ~14-15% RoE, rendering favourable risk-reward. We maintain ‘BUY/SP’ with TP of INR154.