Buy Rural Electrification Corporation; target of Rs 200: Axis Direct

Axis Direct's research report on Rural Electrification Corporation

Q1FY18 was subdued marked by 15 bps QoQ decline in margin to 4.4% and marginal deterioration in asset quality. GNPAs increased ~19 bps QoQ at 2.6% and coverage ratio remained flat at ~34%. PAT was lower than expected at Rs 13 bn (down 8.4% YoY) due to lower NII (down ~9% YoY) and higher provisions. On positive front, loan growth revived (up 10% YoY).

Outlook

As indicated earlier, the management expects FY18 loan growth to be ~15% driven by renewables. It expects to clock Rs 100-120 bn of renewable loan sanctions and ~Rs 50 bn of disbursements in FY18. Lending to private sector will be under watch, as CAG recently has flagged lack of proper due diligence by PFC and REC on loans given to private power producers over FY14-16; however, the management has refuted these claims.