Maintain hold on Rural Electrification Corp (REC) with a September-2016 target price of Rs 290 per share. We do not expect power sector dynamics to improve materially in the near term and this will continue to weigh on REC’s performance. The company’s credit costs are likely to remain high in FY16/FY17 as asset quality pressures continue in the near term. Current ROEs do not adequately reflect the true position as credit cost and NPAs are substantially low due to regulatory forbearance. Even if SEBs were able to improve their financials, we believe challenges to loan growth and margins will linger.
REC’s Q2FY16 PAT grew 8% y-o-y to Rs 1,620 crore, ahead of our estimates.
REC’s GNPA ratio increased by 22 bps q-o-q to 1.1% in Q2 as a loan account worth Rs 510 crore (Facor Power) slipped into NPA and incremental provisioning of 10% was created on this account – unduly low in our view.
The restructured pool increased by 3% q-o-q to R19,300 crore or 10% of total loans – very high in our view.
Restructuring of both private sector as well as public sector loans rose 3% q-o-q to Rs 123 billion and Rs 71 billion,
respectively.
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