Buy Rural Electrification, MoU signed with TSGENCO for funding for proposed projects

CMP 280.80

Target Price 315.00

ISIN: INE020B01018

JULY 2nd

, 2015

RURAL ELECTRIFICATION CORPORATION LTD

Result Update (PARENT BASIS): Q4 FY15

BUYBUYBUYBUY

Index Details

Stock Data

Sector Finance(NBFC)

BSE Code 532955

Face Value 10.00

52wk. High / Low (Rs.) 383.35/234.00

Volume (2wk. Avg. Q.) 120000

Market Cap (Rs. in mn.) 277278.77

Annual Estimated Results (A*: Actual / E*: Estimated)

YEARS FY15A FY16E FY17E

Net Sales 202295.30 229605.17 256698.58

EBITDA 192784.10 216376.99 240338.76

Net Profit 52598.70 57553.47 62237.09

EPS 53.27 58.28 63.03

P/E 5.27 4.82 4.46

Shareholding Pattern (%)

1 Year Comparative Graph

RURAL ELECTRIFICATION CORPORATION LTD BSE SENSEX

SYNOPSIS

Rural Electrification Corporation Ltd (REC) is one of

the leading public financial institutions in the country,

funding almost all needs of entire Power

Infrastructure space.

In Q4 FY15, the company’s Net sales ramps up by

20.05% y-o-y of Rs. 53334.00 million against Rs.

44425.10 million in the corresponding quarter of the

previous year.

Net profit of the company stood at Rs. 10965.00

million for the 4th quarter of FY 2015 as against Rs.

11917.00 million for the 4th quarter of FY 2014.

The company has reported an EBITDA of Rs. 47534.90

million, an increased by 11.27% against Rs. 42720.90

million over corresponding quarter of previous year.

Profit before tax (PBT) of the company increased by

0.69% y-o-y and stood at Rs. 16590.40 million in Q4

FY15 compared to Rs. 16477.00 million in Q4 FY14.

The company has declared a Final Dividend at the rate

of Rs. 2.70/- per share on face value of Rs. 10.00/-

each for the Financial Year 2014-15.

REC signed a MoU with, Telanagana State Generation

Corporation (TSGENCO) for a funding of Rs.240000.00

million.

Net Sales grew by 19% to Rs 202295.30 million for the

end of FY15 from Rs 170179.80 million for the end of

FY14.

Net sales and PAT of the company are expected to

grow at a CAGR of 17% and 13% over 2014 to 2017E

respectively.

PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

REC Ltd 280.80 277278.77 53.27 5.27 1.12 107.00

Power Finance Co. Ltd 256.65 338788.40 45.14 5.69 1.02 91.00

IDFC Ltd 150.35 239627.80 10.58 14.21 1.62 26.00

Reliance Capital Ltd 364.15 91996.20 29.96 12.15 0.74 90.00

Analysis & Recommendation - ‘BUY’

In 4th quarter of FY15, the company’s total income (including other income) registered 19.62% up y-o-y to Rs.

53707.60 million from Rs. 44900.00 million in 4th quarter of FY14. During Q4 FY15, net profit of the company

stood at Rs. 10965.00 million against Rs. 11917.00 million over corresponding quarter of previous year.

Operating profit or EBIDTA of the company ramps up by 11.27% from Rs. 42720.90 million in Q4 FY14 to Rs.

47534.90 million in Q4 FY15. In the same quarter, Profit before tax (PBT) of the company increased by 0.69% y-

o-y and stood at Rs. 16590.40 million compared to Rs. 16477.00 million in corresponding quarter of previous

year.

The company strives to sustain and maintain consistent growth rate and surge ahead to attain still greater

heights of performance to match the expectations of all its stakeholders. We expect that the company surplus

scenario is likely to continue for the next three years, will keep its growth story in the coming quarters also. Over

2014-2017E, we expect the company to post a CAGR of 17% in its top-line and 13% in its bottom-line

respectively. Hence, we recommend ‘BUY’ for ‘Rural Electrification Corporation Ltd “with a target price of

Rs. 315.00 on the stock.

QUARTERLY HIGHLIGHTS (PARENT BASIS)

Results updates- Q4 FY15,

Rural Electrification Corporation Limited provides loan assistance to SEBs/State Power Utilities for investments

in rural electrification schemes through its Corporate Office located at New Delhi. The company work towards

fulfilling power sector borrowers requirements and has reported its financial results for the quarter ended 31st

March, 2015.

The company’s Net sales registered 20.05% increase y-o-y of Rs. 53334.00 million for the 4th quarter of the

financial year 2015 as against Rs. 44425.10 million in the corresponding quarter of the previous year. In Q4

FY15, the company’s net profit stood at Rs. 10965.00 million against Rs. 11917.00 million in the corresponding

quarter of the previous year. The company has reported an EBITDA of Rs. 47534.90 million and increased by

11.27% against Rs. 42720.90 million over corresponding quarter of previous year. EPS of Rs. 11.10 for the 4th

quarter as against an EPS of Rs. 12.07 in the corresponding quarter of the previous year.

Rs. In million Mar-15 Mar-14 % Change

Net Sales 53334.00 44425.10 20.05

PAT 10965.00 11917.00 (7.99)

EPS 11.10 12.07 (7.99)

EBITDA 47534.90 42720.90 11.27

Break up of Expenditure:

Latest Updates

• Rural Electrification Corporation Limited (REC) signed the Memorandum of Understanding (MoU) with

Ministry of Power, GoI for setting out various Financial and Physical Targets for FY 2015-16.

• REC signed a MoU with, Telanagana State Generation Corporation (TSGENCO) for a funding of Rs.24000

Crores. The proposed projects of 6,280 MW include 800 MW at Kothagudem Thermal Power Station, 1080

MW at Bhadradri in Manugur of Khammam District and 4400 MW at Damaracherla in Nalgonda District.

• The company has reported that the Project Specific Special Purpose Vehicles (SPVs) has incorporated, as

wholly owned subsidiary Companies of REC Transmission Projects Company Limited (RECTPCL), a Wholly

Owned Subsidiary Company of RECL.

• The Loan Asset Book of the company as on 31st March, 2015 has increased to Rs. 1796470.00 mn and the

outstanding borrowing is Rs. 1510240.00 mn. Net worth of the company has increased to Rs.248570.00 mn.

• The company has recommended final dividend of Rs. 2.70/- per share, in addition to the interim dividend of

Rs. 8.00 per share of Rs. 10.00/- each for the FY 2014-15.

Consolidated results for the Year ended March 31, 2015;

• The Group has posted a net profit after taxes, Minority interest and Share of Profit/(Loss) of Associates of Rs.

53444.20 million for the year ended March 31, 2015 as compared to Rs. 47412.50 million for the year ended

March 31, 2014.

• Total Income has increased from Rs. 172289.40 million for the year ended March 31, 2014 to Rs. 205498.60

million for the year ended March 31, 2015.

Break up of Expenditure

Rs. In millions

Q4 FY15 Q4 FY14 Chng %

Employee Benefits Exp 383.30 196.80 95%

Dep & Amortization Exp 14.70 10.40 41%

Other Expenses 1058.60 509.10 108%

Allowance against

Restructured loan 955.9 1474.60 -35%

Allowance for bad & doubtful

debts 1217.70 0.00 -

COMPANY PROFILE

Rural Electrification Corporation Limited (REC), a NAVRATNA Central Public Sector Enterprise under Ministry of

Power, was incorporated on July 25, 1969 under the Companies Act 1956. REC a listed Public Sector Enterprise

Government of India with a net worth of Rs. 248570.00 million as on 31st March, 2015. Its main objective is to

finance and promote rural electrification projects all over the country. It provides financial assistance to State

Electricity Boards, State Government Departments and Rural Electric Cooperatives for rural electrification

projects as are sponsored by them. The company named as “Best Employer India 2013” and conferred with “The

AON Hewitt Voice of Employees Award Public Sector Enterprises India 2013”

REC provides loan assistance to SEBs/State Power Utilities for investments in rural electrification schemes

through its Corporate Office located at New Delhi and 20 field units (Project Offices), which are located in most of

the States. Rec, shall work towards fulfilling power sector borrowers requirements and by mobilizing funds from

various sources at lowest possible cost and strive to improve customers satisfaction on continual basis. The

Project Offices in the States coordinate the programmes of REC’s financing with the concerned SEBs/State Power

Utilities and facilitate in formulation of schemes, loan sanction and disbursement and implementation of

schemes by the concerned SEBs/State Power Utilities.

Projects � Generation-Conventional

� Generation-Renewable

� Transmission & Distribution

� International Co-operation & development

SCHEMES FINANCED BY REC

CATEGORY

• Project Intensive Electrification: P:IE

To cover intensive load development for providing connections to rural consumers in already electrified

areas

• Project Pumpsets: SPA:PE

Aims at energisation of pump sets

• Project system Improvement: P:SI

To strengthen and improve the transmission, sub transmission and distribution system in the designated

area & also lines for power evacuation.

• SI: Meters, Transformers, Conductors, capacitors etc. (Bulk loan)

Used For procurement and installation of meters, transformers and capacitors etc.

• Short Term Loan

To provide finance to the Power Utilities and State Governments to meet their working capital requirement

for different purposes, such as purchase of fuel for power plant, purchase of power, purchase of material and

minor equipment, system and network maintenance including transformer repairs, etc.

• Debt Refinancing

The Scheme aims to facilitate reduction of the cost of borrowings of State Power Utilities/highly rated private

power utilities by repaying their high cost term loans raised from other Banks/Financial Institutions for

eligible projects/schemes.

• Financing Equipment manufacturers

To provide Short term Loan/Medium term loan to the manufacturers of Power/Electrical material for power

project.

• RE Cooperatives

Development of rural electric cooperative societies

• Generation

To provide term loan to State/ Central Sector/ Private Sector Companies for Generation projects covering all

types of schemes/categories irrespective of nature, size and source of generation.

Subsidiary Companies

� Raichur Sholapur Transmission Co. Ltd.

� REC Power Distribution Co. Ltd.

� REC Transmission Projects Co. Ltd

� Vizag Transmission Ltd.

� Nellore Transmission Ltd.

� Unchahar Transmission Ltd.

� Kudgi Transmission Ltd.

FINANCIAL HIGHLIGHT (PARENT BASIS) (A*- Actual, E* -Estimations & Rs. In Millions)

Balance Sheet as at March31, 2014 -2017E 2014A 2015A 2016E 2017E

I. EQUITY AND LIABILITIES:

A) Shareholders’ Funds:

a) Share Capital 9874.60 9874.60 9874.60 9874.60

b) Reserves and Surplus 196820.00 238695.70 284047.88 335176.50

Sub-Total Net worth 206694.60 248570.30 293922.48 345051.10

B) Non-Current Liabilities:

a) Long-term borrowings 1101623.00 1311683.20 1500565.58 1695639.11

b) Deferred Tax Liabilities [Net] 1736.90 1073.20 794.17 627.39

c) Other Long Term Liabilities 235.20 361.60 477.31 596.64

d) Long Term Provisions 4422.40 10070.90 11279.41 12407.35

Sub-Total Long term liabilities 1108017.50 1323188.90 1513116.47 1709270.49

C) Current Liabilities:

a) Short-term borrowings 25400.00 7340.00 4404.00 2862.60

b) Other Current Liabilities 185837.30 248114.00 302699.08 357184.91

c) Short Term Provisions 2579.60 4537.10 5807.49 7085.14

Sub-Total Current Liabilities 213816.90 259991.10 312910.57 367132.65

TOTAL EQUITY AND LIABILITIES (A + B + C) 1528529.00 1831750.30 2119949.52 2421454.24

II. ASSETS:

D) Non-Current Assets:

a) Fixed Assets 818.30 813.20 891.27 962.57

b) other non-current assets 321.20 771.30 1095.25 1445.72

c) Non Current Investments 16606.30 11748.10 12100.54 12705.57

d) Long Term Loans and Advances 1358989.70 1642137.80 1905540.16 2181843.48

Sub-Total Non-Current Assets 1376735.50 1655470.40 1919627.22 2196957.35

E) Current Assets:

a) Current Investments 471.60 4386.60 6053.51 8172.24

b) Cash and Bank Balances 11929.40 5229.00 4287.78 4502.17

c) Short Term Loans and Advances 3815.80 11002.40 14083.07 17603.84

d) Other Current Assets 135576.70 155661.90 175897.95 194218.65

Sub-Total Current Assets 151793.50 176279.90 200322.31 224496.89

TOTAL ASSETS (D + E) 1528529.00 1831750.30 2119949.52 2421454.24

Annual Profit & Loss Statement for the period of 2014 to 2017E

Value(Rs.in.mn) FY14A FY15A FY16E FY17E

Description 12m 12m 12m 12m

Net Sales 170179.80 202295.30 229605.17 256698.58

Other Income 1028.20 1585.20 1696.16 1865.78

Total Income 171208.00 203880.50 231301.33 258564.36

Expenditure -5470.10 -11096.40 -14924.34 -18225.60

Operating Profit 165737.90 192784.10 216376.99 240338.76

Interest -100384.60 -118446.10 -133844.09 -150440.76

Gross profit 65353.30 74338.00 82532.90 89898.00

Depreciation -42.10 -67.60 -78.08 -89.79

Profit Before Tax 65311.20 74270.40 82454.82 89808.21

Tax -18474.20 -21671.70 -24901.36 -27571.12

Net Profit 46837.00 52598.70 57553.47 62237.09

Equity capital 9874.60 9874.60 9874.60 9874.60

Reserves 196820.00 238695.70 284047.88 335176.50

Face value 10.00 10.00 10.00 10.00

EPS 47.43 53.27 58.28 63.03

Quarterly Profit & Loss Statement for the period of 30th Sept 2014 to 30th June, 2015E

Value(Rs.in.mn) 30-Sep-14 31-Dec-14 31-Mar-15 30-Jun-15E

Description 3m 3m 3m 3m

Net sales 50237.10 52052.90 53334.00 55254.02

Other income 425.60 390.30 373.60 396.02

Total Income 50662.70 52443.20 53707.60 55650.04

Expenditure -744.00 -2403.10 -6172.70 -4475.58

Operating profit 49918.70 50040.10 47534.90 51174.46

Interest -29544.70 -30448.70 -30929.80 -32043.27

Gross profit 20374.00 19591.40 16605.10 19131.19

Depreciation -17.70 -16.50 -14.70 -23.81

Profit Before Tax 20356.30 19574.90 16590.40 19107.38

Tax -5348.80 -5776.60 -5625.40 -5961.50

Net Profit 15007.50 13798.30 10965.00 13145.88

Equity capital 9874.60 9874.60 9874.60 9874.60

Face value 10.00 10.00 10.00 10.00

EPS 15.20 13.97 11.10 13.31

Ratio Analysis

Particulars FY14A FY15A FY16E FY17E

EPS (Rs.) 47.43 53.27 58.28 63.03

EBITDA Margin (%) 97.39% 95.30% 94.24% 93.63%

PBT Margin (%) 38.38% 36.71% 35.91% 34.99%

PAT Margin (%) 27.52% 26.00% 25.07% 24.25%

P/E Ratio (x) 5.92 5.27 4.82 4.46

ROE (%) 22.66% 21.16% 19.58% 18.04%

ROCE (%) 12.43% 12.30% 12.03% 12.49%

Debt Equity Ratio 5.45 5.31 5.12 4.58

EV/EBITDA (x) 8.40 8.25 8.22 7.71

Book Value (Rs.) 209.32 251.73 297.66 349.43

P/BV 1.34 1.12 0.94 0.80

Charts

OUTLOOK AND CONCLUSION

� At the current market price of Rs. 280.80.00, the stock P/E ratio is at 4.82 x FY16E and 4.46 x FY17E

respectively.

� Earning per share (EPS) of the company for the earnings for FY16E and FY17E is seen at Rs.58.28 and

Rs.63.03 respectively.

� Net Sales and PAT of the company are expected to grow at a CAGR of 17% and 13% over 2014 to 2017E

respectively.

� On the basis of EV/EBITDA, the stock trades at 8.22 x for FY16E and 7.71 x for FY17E.

� Price to Book Value of the stock is expected to be at 0.94 x and 0.80 x respectively for FY16E and FY17E.

� We recommend ‘BUY’ in this particular scrip with a target price of Rs.315.00 for Medium to Long term

investment.

INDUSTRY OVERVIEW

India has a diversified financial sector, which is undergoing rapid expansion. The sector comprises commercial

banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and

other smaller financial entities. The financial sector in India is predominantly a banking sector with commercial

banks accounting for more than 60 per cent of the total assets held by the financial system.

India's services sector has always served the country’s economy well, accounting for about 57 per cent of the

gross domestic product (GDP). In this regard, the financial services sector has been an important contributor.

The Government of India has introduced reforms to liberalise, regulate and enhance this industry. At present,

India is undoubtedly one of the world's most vibrant capital markets. Challenges remain, but the future of the

sector looks good. The advent of technology has also aided the growth of the industry. About 75 per cent of the

insurance policies sold by 2020 would, in one way or another, be influenced by digital channels during the pre-

purchase, purchase or renewal stages, as per a report by Boston Consulting Group (BCG) and Google India.

Market Size

The size of banking assets in India reached US$ 1.8 trillion in FY14 and is expected to touch US$ 28.5 trillion by

FY25. The Association of Mutual Funds in India (AMFI) data show that assets of the mutual fund industry have hit

an all-time high of about Rs 12 trillion (US$ 189.83 billion). Equity funds had inflows of Rs 52170.00 mn (US$

825.49 million), taking total inflows on a year-to-date basis to Rs 610890.00 mn (US$ 9.66 billion). Income funds

and liquid funds account for the largest proportion of AUM, with Income funds accounting for Rs 5.22 trillion

(US$ 82.59 billion) and equity funds accounting for Rs 3.06 trillion (US$ 48.41 billion).

Investments/Developments

• India has moved a step closer to having a Singapore- or Dubai-like financial hub, with the Securities and

Exchange Board of India (SEBI) approving a framework for international financial centres (IFCs)

• Maharashtra’s plans to promote Mumbai as a global financial centre have received further encouragement as

Wall Street firm JPMorgan Chase & Co. and the Japanese government arm Japan External Trade Organization

(Jetro) agreed to partner with the state government to hold road shows to attract financial services

companies to Mumbai.

• Bandhan Financial Services Pvt. Ltd has raised Rs 16000.00 mn (US$ 252.97 million) from two international

institutional investors to help convert its microfinance business into a full service bank.

• JP Morgan Asset Management (UK) Ltd, JP Morgan Investment Management Inc and JP Morgan Chase Bank

NA, have acquired a 4.11 per cent stake in Mahindra & Mahindra Financial Services Ltd for Rs 1137.50 mn

(US$ 17.98 million).

Government Initiatives

Several measures have been outlined in the Union Budget 2014-15 that aim at reviving and accelerating

investment which, inter alia, include fiscal consolidation with emphasis on expenditure reforms and continuation

of fiscal reforms with rationalization of tax structure; fillip to industry and infrastructure, fiscal incentives and

concrete measures for transport, power, and other urban and rural infrastructure; measures for promotion of

foreign direct investment (FDI) in selected sectors, including defence manufacturing and insurance; and, steps to

augment low cost long-term foreign borrowings by Indian companies. Fiscal reforms have been bolstered further

by the recent deregulation of diesel prices. The launch of ‘Make in India’ global initiative is intended to invite

both domestic and foreign investors to invest in India. The aim of the programme is to project India as an

investment destination and develop, promote and market India as a leading manufacturing destination and as a

hub for design and information. The programme further aims to radically improve the Ease of Doing Business,

open FDI regime, improve the quality of infrastructure and make India a globally competitive manufacturing

destination.

Road Ahead

India is today one of the most vibrant global economies, on the back of robust banking and insurance sectors. The

country is projected to become the fifth largest banking sector globally by 2020, as per a joint report by KPMG-

CII. The report also expects bank credit to grow at a compound annual growth rate (CAGR) of 17 per cent in the

medium term leading to better credit penetration. Life Insurance Council, the industry body of life insurers in the

country also projects a CAGR of 12–15 per cent over the next few years for the financial services segment.

Also, the relaxation of foreign investment rules has received a positive response from the insurance sector, with

many companies announcing plans to increase their stakes in joint ventures with Indian companies. Over the

coming quarters there could be a series of joint venture deals between global insurance giants and local players.

Disclaimer:

This document is prepared by our research analysts and it does not constitute an offer or solicitation for the

purchase or sale of any financial instrument or as an official confirmation of any transaction. The information

contained herein is from publicly available data or other sources believed to be reliable but we do not represent that

it is accurate or complete and it should not be relied on as such. Firstcall Research or any of its affiliates shall not be

in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. Firstcall Research and/ or its affiliates and/or employees will not be liable for

the recipients’ investment decision based on this document.

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