Analysing REC Ltd. with Sonam Shrivastava

For over five decades, the Rural Electrification Corporation (REC) has been a vital force in India's electrification journey. Established in 1969 to support rural development through electrification, REC has made significant strides in the power sector. It set up a national training institute in 1979, became a Public Financial Company in 1992, and received Mini Ratna status in 2002. The company's achievements culminated in 2008 when it was listed on the stock exchange, with a 27 times subscription rate reflecting investor confidence.

REC's hard work and dedication didn't go unnoticed, and in the same year, it was elevated to a Navratna status, a title given to the nine best performing PSUs. REC's unwavering commitment to the power sector continued, and in 2019, it was divested when Power Finance Corporation acquired 52.63% of its shareholding.

REC's journey is an indication of its commitment to rural electrification and promoting sustainable development. With over five decades of experience in financing, promoting, and developing rural electrification projects, REC has been an integral part of India's electrification journey, bringing light to the darkness and empowering millions with access to electricity.

Financials of REC Ltd.

REC Ltd, one of India's leading power sector financiers, has reported its financial results for the second quarter ended 30th September 2022. The company's net interest income for the quarter stood at ₹3959.63 crore, a 5% YoY decline and a 1% QoQ dip. The net interest margin also fell from 4.41% to 3.73% YoY. However, despite the challenging economic climate and adverse currency impact, REC Ltd recorded a stable income with a forex translation loss of around ₹457 crore.

The pre-provision operating profit for the company fell by 19% YoY. However, due to an improvement in asset quality and resolution of previous stressed accounts, the provisioning need has reduced, resulting in a 12% sequential increase in net profit. The Earnings per share for the quarter ended 30th September 2022 were recorded at ₹41.11 per share, up from ₹37.16 per share as of 30th June 2022.

REC Ltd's disbursement remained healthy at ₹30,269 crore for the first half of FY23, with the growth for the renewable segment being the strongest of all. The loan book also rose by 2% YoY to ₹3.94 lakh crore as of 30th September 2022. Additionally, during Q2FY23, projects sanctioned under T7D include Late Payment Surcharge (LPS) of ₹54,809 crore and a Revolving bill payment facility (RBPF) of ₹20,853 crore.

Despite the challenging economic climate and the adverse impact of currency, REC Ltd has been able to maintain a stable income and disbursement while recording sequential growth in net profit. This is a testament to the company's effective cost management and its commitment to supporting India's power sector development.

Studying REC Ltd's loan book 

REC has been able to maintain a healthy capitalization level, providing ample opportunities for business growth. In fact, as of Q2FY23, REC's total capital adequacy ratio stood at an impressive 25.15%. With its quasi-government status, the company has been able to secure funds from various sources, such as external commercial borrowings, domestic financial institutions, long-term bonds, bank loans, commercial papers, infrastructure bonds, and tax-free bonds, among others, at a competitive rate.

During H1FY23, REC raised an impressive ₹28,486 crore, an evidence to its strong financial position and the trust it has garnered in the market. It's worth noting that the company's long-term borrowings have been awarded a “AAA'' rating by Domestic Credit Ratings, indicating its strong creditworthiness, while international rating agencies have given REC a BBB- rating, further highlighting its financial strength. 

Asset Quality

REC's efforts towards improving asset quality are starting to pay off, as seen in the latest numbers. In Q2FY23, both GNPA and NNPA saw a sequential improvement of 38 basis points and 17 basis points, standing at 4.03% and 1.24%, respectively. Additionally, the company successfully resolved two credit-impaired assets, totaling ₹1243 crore, under the insolvency and bankruptcy code.

There are currently 23 projects under resolution, out of which 11 worth ₹10,869 crore (provision cover of 77%) are in NCLT, and 12 worth ₹5,010 crore (provision cover of 53%) are outside NCLT for resolution. The private sector contribution to the total loan book has increased to 10%, indicating improvement in the health of the book.

This is significant, given that the private sector has been vulnerable to asset quality risks, such as lack of fuel availability, inability to pass on fuel price increases, and the absence of long-term power purchase agreements for assured power off-take. Finally, the company has also moderated its exposure to the top 10 borrowers, which stands at 41.5% as of September 2022. Overall, REC's focus on asset quality has led to positive results, giving investors confidence in the company's long-term sustainability.

A closer look at the charts reveals a promising trend for this company. It's clear that its Profit After Tax has been steadily growing year after year, and the same goes for its Earnings per share, except for a small dip in FY2020. What's more, the loan book, book value per share, and net worth have all shown consistent growth, with no impediments even in the volatile year of 2020. And for retail investors, the cherry on top is the healthy dividend yield, which has also been growing at a steady pace.

But the real appeal of this stock goes beyond its current value or dividends. What's truly exciting is the potential for future growth and development of the company. As markets and industries evolve, this company has demonstrated the resilience and adaptability necessary to stay ahead of the curve. And with its strong financials and smart management, there's no telling where this stock could go in the years to come. So for investors looking to capitalise on a sure bet with plenty of room to grow, this stock is definitely worth keeping an eye on.

When it comes to assessing the performance of a non-banking financial company (NBFC), there are several key metrics that need to be taken into account. The net interest margins (NIMs), yields and cost of borrowing are all crucial indicators of the company's financial health. Looking at these metrics for this particular NBFC, we see that the yields have remained consistent around 10%, while the cost of borrowing has ranged between 6-7%. The NIMs have also remained healthy, bouncing around the 3.8-4.4% range, and are expected to stay around 4%, which is great for a corporate organisation.

But what about non-performing assets (NPAs)? Well, the good news is that the bad assets have been on a steady decline, going from 7.3% in FY 2019 to 4.6% in FY 2022, and are projected to continue to decrease to 3.8% by FY 2024. This sets up a potential growth story for this NBFC, especially considering that many investors have shied away from PSU stocks, perceiving them as troublesome, resulting in undervaluation of the stock.

However, the trends in the above-mentioned metrics suggest a positive outlook for this NBFC as both a value play and for earnings expectations. Return ratios have rebounded from the dip in FY 2020 and appear to have stabilised, followed by a healthy growth in dividend per share. In fact, if you do not make a price return, the company has got you covered with dividend payments.

All in all, this NBFC seems to be a promising investment opportunity, with strong financials and an optimistic outlook.

Key Ratios of REC Ltd

As investors, we often rely on financial ratios to get a clear picture of a company's performance and value. In the case of NBFCs, the yields, returns, and valuations are critical factors to consider. Looking at the numbers for this company, we can see that the yields have remained stable around 10%, which is a positive sign. The return on equity and assets also appear attractive at 21.3% and 2.5%, respectively, for the year FY 2022.

When it comes to valuation ratios, we can see that the Earnings per share is at a healthy 50% and is expected to grow in the future. The Price/Earnings ratio stands at 2.4, which indicates that the company is undervalued and presents a great value proposition for investors. Additionally, the book value per share is expected to grow, and the Price/Book value ratio, which is a more appropriate metric for NBFCs, is reduced to 0.5 and is further expected to reduce.

Who Holds the Power in REC Ltd.?

The shareholding pattern of a company can reveal a lot about the confidence of various investors in the company's prospects. Looking at REC Ltd.'s shareholding pattern, we can see that a majority of the stakes, around 52.63%, are held by PFC, the promoters. This suggests that the company is backed by a strong and stable promoter group who have a vested interest in the success of the company.

Foreign institutions hold the second largest chunk of stakes, around 23.4%. However, their investments have shown a declining trend in India, and as a result, REC Ltd. has experienced a decrease in FII holdings. But this may not be the end of the story as the global economic climate continues to evolve and investors may start coming back to emerging markets.

The remaining stakes are held by retail investors and other domestic institutions, which indicates a good mix of investor confidence in the company. The fact that mutual funds hold around 7.94% of the stakes is also encouraging, as it suggests that professional fund managers have faith in the company's potential for growth.

Overall, REC Ltd.'s shareholding pattern reveals a healthy mix of stakeholders, including a strong promoter group, institutional investors, and retail investors. This suggests that the company has a good foundation to build on and could be a promising investment opportunity for those looking for long-term growth potential.

A Bright Future for REC Ltd.?

As we dive deeper into the future prospects of REC Ltd., it is clear that the company has a promising road ahead. With the recent reforms in the power sector and the company's expansion into new business avenues, REC Ltd. is poised for growth. Not to mention, the company's Maharatna status provides it with a number of benefits, further adding to its potential.

Analysts from various institutions seem to be in agreement about the positive outlook for REC Ltd. They have projected a high return expectation, which is good news for investors. With a potential return of around 11-12% from the current price, the company presents an attractive opportunity for those looking to invest in a strong player in the NBFC space.

REC Ltd. Peer Analysis

REC Ltd. operates in a highly competitive sector, and it's important to compare its performance against its peers to determine its standing. Its biggest competitor is Power Fin Corporation, which interestingly holds a stake in REC Ltd. Although there were talks of a merger between the two companies, the government's restrictions on how much exposure a single company can have to a particular industry make this prospect unlikely at present. Nevertheless, Power Fin Corporation and REC Ltd. are closely linked companies and dominate the sector.

Another significant competitor in this space is Indian Railway Finance Corporation (IRFC), which specialises in financing railway infrastructure projects. When comparing REC Ltd.'s performance against its peers, we can see that its sales growth rate is at the median value among its competitors. However, its one-year return has been robust.

Furthermore, REC Ltd. has the advantage of having better profitability ratios and a higher dividend yield than its competitors, making it an attractive buy for investors. Although the company faces stiff competition from other players, its solid financials, steady growth trajectory, and government support have positioned it well in the market.

Navigating the Choppy Waters

Investing in REC Ltd. comes with certain risks that investors should be aware of. One of the key risks is the potential deterioration of asset quality, which could lead to erosion of Tier 1 capital. 

Another risk is the exposure to the power sector, which could be affected by issues such as fuel availability and disputed power sale tariffs, potentially leading to defaults by borrowers. Banks' exposure limit to infrastructure finance companies and resistance to PSU sector reforms are also concerns. 

Additionally, with the recent approval to lend to new sectors, REC's lack of experience in these areas could pose a risk, as could competition from banks. Finally, while the trend is declining, REC still has a high exposure to its top 10 borrowers, which account for 42% of its loan asset portfolio. Investors should carefully consider these risks before making an investment decision in REC Ltd.

What does the "Maharatna" status mean for REC Ltd.'s Future?

The provision of "Maharatna" status to REC Ltd. in 2022 and the amendment of the Memorandum of Association have opened up new opportunities for growth and expansion. The benefits of increased autonomy, financial independence, and enhanced brand image provide REC with a strong platform for diversifying its portfolio, reducing risk, and creating new revenue streams.

With expanded business scope, the company can now fund infrastructure and logistics projects, creating new avenues for growth. Overall, these developments position REC for strong future growth and shareholder value.

The Bottom Line

REC Ltd is a Maharatna company with a strong foothold in the power sector, but it is also expanding its reach into infrastructure and logistics sectors. With favourable government policies, REC Ltd is poised for growth and expansion. 

However, investors should be aware of the risks associated with the power sector, such as asset quality deterioration and challenges in carrying out reforms in the PSU sector. Despite these challenges, REC Ltd has the potential to provide attractive returns to investors as it competes with its peers and navigates the ever-evolving landscape of the Indian power and infrastructure sectors.