30 May 2012
4QFY12 Results Update | Sector: Financials
Rural Electrification Corp
BSE SENSEX
S&P CNX
16,312
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel.Perf.(%)
M.Cap. (INR b)
M.Cap. (USD b)
4,951
RECL IN
987.5
251/144
-14/-10/-9
166.7
3.0
CMP: INR168
TP: INR210
Buy
Rural Electrification Corporation (RECL) posted PAT of INR7.6b for 4QFY12, largely flat QoQ and 4% below our
estimate, on lower than expected topline performance. However, adjusting for bond issue expenses (~INR400m),
which impacted margins, performance has been in line with expectations.
Key highlights:
Despite healthy loan growth of 7% QoQ, NII grew 2% QoQ to INR10.2b, as margins contracted 8bp QoQ to
4.26%. However, adjusting for INR400m bond issue expenses, performance was in line with expectations.
Spreads improved 17bp QoQ, led by 26bp lower cost of funds, as nearly 80% of incremental borrowings
during the quarter were low cost.
Business growth remained healthy, driven by strong growth in T&D segment. Sanctions grew 14% QoQ (but declined
55% YoY on a high base) to INR100.7b. Disbursements grew 56% QoQ (19% YoY) to INR98.8b. 68% of incremental
disbursements were in the T&D segment. Loan book grew by a healthy 24% YoY and 7% QoQ to INR1.01t.
Asset quality remained stable QoQ; as a result, provisioning expenses declined to INR32m v/s INR241m in
3QFY12. RECL restructured loans worth ~INR50b in 4QFY12 due to delay in commissioning of projects.
Outstanding restructured loan book stood at ~INR200b (19.7% of o/s loans).
Valuation and view:
Given the strong sanctions pipeline, we expect a healthy 19% loan CAGR over FY12-14.
However, in the current macroeconomic environment, asset quality is a bigger concern than growth slowdown.
We expect earnings CAGR of 19%, with average RoA of ~3% over FY12-14. The stock trades at 1x FY13E and 0.9x
FY14E BV. Maintain
Buy.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com) + 91 22 3982 5415
Umang Shah
(Umang.Shah@MotilalOswal.com) + 91 22 3982 5521

Rural Electrification Corp
Quarterly performance v/s our estimates and reasons for deviation (INR m)
Y/E March
Net Income
Other Operating Inc.
Other Income
Total Net Income
Operating Expenses
Operating Profit
Other Provisions
Profit before Tax
Tax Provisions
Net Profit
4QFY12A
10,207
206
530
10,943
671
10,273
32
10,241
2,618
7,623
4QFY12E
10,538
694
382
11,614
550
11,064
259
10,805
2,864
7,941
Var (%)
-3
-70
39
-6
22
-7
-88
-5
-9
-4
Comments
Bond issue expenses of INR400m led to lower than expected NII
Higher other opex led to higher than expected total opex
Stable asset quality led to lower provisions
Lower than exp. topline performance led to lower than
exp. bottomline growth
Source: Company/MOSL
T&D segment drives growth in both sanctions and disbursements
Business growth remained healthy. Sanctions grew 14% QoQ (but declined 55% YoY
on a high base) to INR100.7b. Incrementally, overall growth in sanctions was driven by
the T&D segment. Sanctions increased 133% YoY and 120% QoQ in the T&D segment,
but declined 94% YoY and 75% QoQ to INR10b in the generation segment. Short-term
loans declined 6% YoY and 10% QoQ to INR9.5b.
Disbursement growth remained strong – up 19% YoY (on a high base) and 56% QoQ to
INR98.8b. Even in disbursements, the growth was mainly driven by the T&D segment
(68% of incremental disbursements) – up 24% YoY and 98% QoQ to INR48.7b.
Generation segment disbursements grew 2% YoY and 33% QoQ to INR36.3b. Short-
term loans grew 70% YoY (on a low base) and 20% QoQ to INR13.8b.
Loan growth remains healthy; excess liquidity built during the quarter
Loan book grew 24% YoY and 7% QoQ to INR1.01t. Segmental loan mix during the
quarter remained largely stable QoQ, with the T&D segment constituting ~49% of the
loan book and the generation segment constituting ~45%. Based on borrower-wise
classification, exposure to state entities increased to ~84% (v/s 82% in 3QFY12), given
the strong disbursement growth in the T&D segment. The share of private sector
declined to 10.5% from 12% in 3QFY12.
Incremental loans and borrowings for the quarter stood at INR65b and INR89b,
respectively. Borrowings grew 29% YoY and 11% QoQ to INR899b. During the quarter,
RECL raised INR30b through tax-free bonds and INR19b through foreign currency
borrowings. It has created excess liquidity on the balance sheet, which would help in
the coming quarters.
Reported margin contracts 8bp QoQ on account of bond issue expenses
Despite healthy loan growth (7% QoQ), NII for the quarter grew 2% QoQ (20% YoY) to
INR10.2b. This is 3% lower than our estimate. Reported margin contracted by 8bp
QoQ to 4.26%. The QoQ margin contraction could be attributed to (1) a 9bp QoQ
decline in yields on account of no income booked on assets fallen into NPA category
in 3QFY12, and (2) ~INR400m bond issue expenses on the funds raised during the
quarter booked under interest expenses. Adjusting for the bond issue expenses,
margins remained largely stable QoQ. Importantly, spreads improved 17bp QoQ, led
by sharp 26bp decline in cost of funds. Nearly 80% of the incremental borrowings
30 May 2012
2

Rural Electrification Corp
during the quarter were low cost (tax-free bonds, capital gains bonds and foreign
currency bonds).
Asset quality remains stable
Asset quality remained stable QoQ. As a result, provisioning expenses declined to
INR32m v/s INR241m in 3QFY12. RECL restructured loans worth ~INR50b in 4QFY12
due to delay in commissioning of projects. Outstanding restructured loan book stood
at ~INR200b (19.7% of o/s loans). RECL has got a 1-year extension from RBI (up to
March 2013) to decide upon the issue of standard asset provisioning and adopting
exposure norms applicable to NBFCs. With the rising risk quotient for SEB loans and
sharply increasing private sector loans proportion, no standard asset provisioning
remains a concern.
Valuation and view
Given the strong sanctions pipeline, we expect a healthy 19% loan CAGR over
FY12-14. However, in the current macroeconomic environment, asset quality is a
bigger concern than growth slowdown.
High SEB losses are driving up the risk quotient, more so for RECL, given its higher
exposure to the T&D segment. However, the government’s continued thrust on
power sector reforms, recourse to SEB collections through an escrow mechanism
and recent tariff hikes by various SEBs provide some comfort.
We expect earnings CAGR of 19%, with average RoA of ~3% over FY12-14. Margin
compression and higher provisioning expenses had impacted RoA in FY12. We
expect margins to stabilize at current levels.
The stock trades at 1x FY13E and 0.9x FY14E BV. Maintain
Buy,
with a target price of
INR210 (1.1x FY14E BV).
4QFY12 concall highlights
Loan Restructuring
RECL has restructured loans worth ~INR50b in 4QFY12 (4.9% of o/s loans) and
~INR120b in full year FY12 (11.8% of o/s loans). Delay in commissioning of projects
has led to rescheduling of loans during the quarter. Outstanding restructured
loan book stood at ~INR200b (19.7% of o/s loans).
Of the above, only one large private power project has been restructured to the
tune of ~INR7.5b and the rest are from the government sector.
RECL has made provision at 0.4% of the exposure to the abovementioned private
power project; while no extra provisions have been made on any other
restructured loans.
The management indicated that there has been no NPV loss on any of the
restructured loans so far and there has been a deferment of payment of principal
by one year.
Asset quality
O/s GNPAs stood at INR4.9b as on March 2012, which includes two large power
projects - Konaseema Power Project and Shree Maheshwar Power Project -
accounting for INR4.71b. RECL has currently made 10% provision on these
accounts.
Remaining INR200m is from co-operative societies and others, which has been
fully provided for.
30 May 2012
3

Rural Electrification Corp
Others
RECL is awaiting ministry approval for its USD1b FCCB issue.
Conversion expected to happen at 25-30% premium to current market price.
Apart from the FCCB issue, RECL is awaiting for approval for raising USD750m in
the form of foreign currency borrowings.
The fund raising would depend on the cost arbitrage based on the rates
prevailing in the domestic market at the time of raising funds.
Of the total FC borrowings, USD700m (~44% of the total FC borrowings) remains
unhedged
However, large part of the borrowings have been raised towards the end of
the year and hence the company has not hedged it.
Repayment of foreign currency borrowings starts from 2016-17.
FY13 Outlook
The management has guided for ~15% disbursement growth and loan growth of
20-25%
Spreads / margins should be maintained
Asset quality will remain a key monitorable - will depend on the policy outcome
on issues such as land acquisition, development of coal mines, progress on
environmental clearances and improvement in financial health of SEBs.
We largely maintain our earnings estimates (INR b)
Old Est.
FY13
46.4
2.7
49.0
2.4
46.6
1.0
45.6
11.9
33.7
4.2
3.1
21.8
FY14
54.3
3.6
57.8
2.9
54.9
1.0
53.9
14.0
39.9
4.2
3.1
22.6
FY13
46.8
2.2
49.0
2.5
46.5
1.0
45.5
11.8
33.7
4.2
3.0
21.4
New Est.
FY14
55.7
2.5
58.2
2.9
55.3
1.0
54.3
14.1
40.2
4.2
3.0
22.4
% Change
FY13
FY14
1.0
2.7
-16.9
-30.2
0.0
0.7
3.6
1.3
-0.2
0.6
0.0
0.0
-0.2
0.6
-0.2
0.6
-0.2
0.6
NII
Other Income
Total Income
Operating Expenses
Operating Profits
Provisions
PBT
Tax
PAT
Margins (%)
RoA (%)
RoE (%)
Source: MOSL
RECL: One year forward P/E (x)
RECL: One year forward P/BV (x)
30 May 2012
4

Rural Electrification Corp
Quarterly trends
Disbursement growth improves sharply
Loan growth remains healthy
Disbursement growth was driven by 98% QoQ growth in
the T&D segment (68% of incremental disbursements)
Loan growth remained healthy, driven by strong sanctions
pipeline of ~INR1.4t
Exposure to state sector increased (%)
Borrowing mix as at the end of March 2012 (%)
Exposure to state sector increased, driven by strong growth
in disbursements in the T&D segment
Proportion of capital gains and tax-free bonds increased
towards the year-end, while the share of FC borrowings
remained largely stable
Reported NIM contracted QoQ (%)
T&D segment comprises 50% of loan book (%)
Reported NIM contracted 8bp QoQ due to bond issue
expenses towards funds raised during the quarter
Segmental loan mix remained fairly stable, with the T&D
segment constituting ~50% of loan book and the
generation segment constituting ~45%
5
30 May 2012

Rural Electrification Corp
Quarterly Snapshot
1Q
2Q
FY11
3Q
4Q
1Q
9,097
217
9,314
383
9,697
490
331
159
9,207
250
8,957
2,338
6,620
2,700
2,270
0.31
0.26
15.9
5.1
2.7
26.1
18.4
11.0
7.9
3.2
4.4
212
55
858
714
72
23
5
55
34
11
43
50
6
82
7
11
2Q
9,501
171
9,673
-880
8,793
456
302
153
8,337
0
8,337
2,112
6,225
2,700
2,270
0.30
0.25
15.9
5.2
0.0
25.3
18.1
11.4
8.3
3.1
4.5
108
61
904
756
27
59
14
49
41
10
44
50
6
82
7
11
FY12
3Q
10,052
136
10,188
1,221
11,408
779
680
99
10,629
241
10,389
2,693
7,695
4,930
4,260
0.52
0.45
13.6
6.8
2.3
25.9
17.4
11.4
8.4
3.0
4.3
88
63
950
811
46
42
12
43
39
18
45
49
6
82
6
12
4Q
Variation (%)
QoQ
YoY
2
52
2
-57
-4
-14
-42
N.M
-3
-87
-1
-3
-1
-1
0
20
-32
18
-55
9
20
-15
N.M.
9
N.M.
8
7
9
N.M.
N.M.
Cumulative Numbers
FY11
FY12 YoYGr (%)
32,578
1,481
34,059
2,384
36,443
1,674
1,275
399
34,768
2
34,766
9,067
25,699
38,857
731
39,588
1,253
40,841
2,395
1,710
685
38,446
523
37,924
9,761
28,162
19
-51
16
-47
12
43
34
72
11
N.M.
9
8
10
Profit and Loss (INR m)
Net Interest Income
7,758 7,801
Other operating income 225
390
Net operating Income 7,984 8,191
Other income
292
555
Net total income
8,275 8,746
Operating Expenses
343
385
Employee
261
260
Others
82
125
Operating Profits
7,933 8,361
Provisions
0
1
PBT
7,933 8,360
Taxes
2,059 2,178
PAT
5,874 6,182
Asset Quality
GNPA
200
200
NNPA
20
20
Gross NPAs (%)
0.03
0.03
Net NPAs (%)
0.00
0.00
PCR (%)
90.0
90.0
Ratios (%)
Cost to Income
4.1
4.4
Prov. to operating profit 0.0
0.0
Tax Rate
26.0
26.0
Total CAR
21.2
20.6
Margins Reported (%)
Yield on earning assets 11.1
11.2
Cost of Funds
7.8
8.0
Spreads
3.4
3.2
NIMs
4.6
4.4
Business Details (INR b)
Sanctions
229
104
Disbursements
46
55
Loans
692
729
Borrowings
575
604
Sanctions discipline wise (%)
Generation
49
46
Trans & Dist
49
43
Short term loans
2
11
Disbursements discipline wise (%)
Generation
70
50
Trans & Dist
26
36
Short term loans & Others 4
14
Loans discipline wise (%)
Generation
41
42
Trans & Dist
51
51
Short term loans & others 8
7
Loans borrower wise (%)
State
86
86
Central PSUs
7
7
Private
7
7
For %age change QoQ and YoY is bp
8,480 8,538
564
303
9,044 8,841
357 1,180
9,401 10,021
386
561
287
468
100
93
9,015 9,460
0
1
9,015 9,459
2,374 2,457
6,641 7,003
200
20
0.03
0.00
90.0
4.1
0.0
26.3
20.2
11.2
7.8
3.4
4.6
106
60
757
632
60
31
9
36
42
22
42
52
7
84
7
9
200
20
0.02
0.00
90.0
5.6
0.0
26.0
19.1
11.0
7.8
3.2
4.3
226
83
817
700
80
15
4
43
47
10
42
51
7
83
7
10
10,207
206
10,413
530
10,943
671
397
274
10,273
32
10,241
2,618
7,623
4,900
4,260
0.48
0.42
13.1
6.1
0.3
25.6
16.0
11.4
8.1
3.2
4.3
101
99
1,014
900
10
81
9
37
49
14
45
49
6
84
6
11
-9
-26
17
-8
14
56
7
11
39
38
1
-8
-55
19
24
29
Source: Company/MOSL
30 May 2012
6

Rural Electrification Corp
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
34.1
40.7
Consensus
Forecast
32.8
37.6
Variation
(%)
4.0
8.4
1-year Sensex rebased
FY13
FY14
Shareholding pattern (%)
Mar-12
Promoter
Domestic Inst
Foreign
Others
66.8
6.4
19.6
7.2
Dec-11
66.8
6.9
18.0
8.3
Mar-11
66.8
4.5
20.8
7.8
30 May 2012
7

Rural Electrification Corp
Financials and Valuation
30 May 2012
8

Rural Electrification Corp
Financials and Valuation
30 May 2012
9

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Rural Electrification Corp
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