>RURAL ELECTRIFICATION CORPORATION (RELIGARE)

Fee income boosts PAT

Rural Electrification Corporation’s (REC) Q4FY09 results are in line with our estimates on the net interest income (NII) level, where growth came in at 20% YoY. But PAT was much above estimates due to higher fee and other income. Loans grew 31% YoY and asset quality remained healthy with gross NPAs at 0.14%.

■ Outstanding sanctions at Rs 0.8tn: Loan disbursals remained stable YoY at Rs 44bn in Q4FY09. For the full financial year, disbursals grew by 32% YoY to Rs 166bn; however, sanctions declined by 12% due to the higher base in FY08. The company has outstanding sanctions of over Rs 0.8bn which provide strong visibility on loan growth for the next few years. We expect a 16% CAGR in disbursals over FY09-FY11 and with repayment at 14–15% of loan assets, we project a 23% growth in loan book during the same period.

■ Margins to be maintained at 4% in FY10: Reported yield on assets improved by ~110bps during the quarter to 11.8% due to a higher PLR and re-pricing of assets, whereas the cost of funds increased by only 86bps as the company raised capital through the issue of commercial paper available at lower costs. Consequently, the reported net interest margin (NIM) improved by ~40bps to 4.25%. We expect the NIM to remain at 4% in FY10 due to re-pricing of loans at a higher rate, but to decline by 20–30bps in FY11.

■ Higher fees from RGGVY boosted other income: REC receives fee income equal to 1% of loans disbursed under the RGGVY scheme. In Q4FY09, the company disbursed loans of Rs 2.7bn under the scheme. But fee income was higher at Rs 390mn as REC booked income on disbursals made in earlier years as well.

■ Marginal increase in NPA: Gross NPAs increased from Rs 640mn in Q3FY09 to Rs 690mn in Q4FY09 due to delinquencies on one account. However, the company has started receiving payments from the account in this quarter.

■ Estimates, target raised but upside limited – Hold: We are raising our FY10 PAT estimate by 6% to factor in higher loan growth and fee income. We also introduce FY11 numbers. PAT is projected to log a 16% CAGR over FY09-FY11. REC may benefit from a possible reduction in risk-weights on government guaranteed loans (constituting ~40% of loan book) from 100% to 20%, which will help it maintain its high leverage and consequently robust ROE.

We are revising our price target to Rs 135 to factor in higher profitability and sustained ROE. We are also assuming a favourable ICAI decision on tax benefits. While we like REC for its strong visibility and asset quality, we believe that absolute returns in the near term will be limited due to the sharp appreciation in stock price in the last three months. Hold.

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