[T.S.R:17399] REC: Downgrade Earnings Estimates ; Loans to SEBs likely to be written off in FY12

We reduce our FY11-13 loan growth and NIM estimates for REC leading to lower PAT.

 

n       Loan growth below expectation, more softening likely. Disbursements grew 39% yoy leading to 24.5% yoy loan growth as of 31 Mar '11 vs. our expectation of 25.8%. Delays in power projects due to environmental clearance and supply-linkage issues, and higher interest rates resulted in the less-than-expected loan growth in FY11 and are likely to further soften the loan growth. We reduce FY11-13e loan CAGR to 21.8% from 27.4%.

n       NIM declines sequentially. Higher ECBs in 4QFY11 (36% of total borrowings in 4Q) at 3.4% led to lower cost of borrowing. Yet NIM declined 22bps qoq to 4.3% due to lower yields in the face of a large repayment. We expect ~25bps contraction in NIM over FY11-13e on increased wholesale borrowing costs, lower incremental ECBs and lower share of tax-free infra bonds.

n       Risk-reward favorable, with strong RoA and RoE. We maintain our RoA at 3.2%, but cut our RoE to ~22% (from 24.5%) for FY11-13e due to reduced loan growth (leverage). The stock has corrected ~50% from its Oct '10 peak. Risk-reward is favorable at current PBV of 1.4x FY12e and 1.2x FY13e.

n     Risks.  Risks: Slowdown in the power sector; regulatory changes
 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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