Rural Electrification Corp (REC) Research Report By NVS Wealth Managers

• Rural Electrification Corporation Limited (REC), a listed NAVRATNA Public Sector Enterprise under the purview of the Ministry of Power, Government of India, was incorporated on July 25, 1969 and currently is one of the leading public Infrastructure Finance Company in India with a network of 18 project offices including 5 Zonal and 3 sub offices along with 1 Training centre.

• REC’s business model spans across the value chain of power infrastructure financing along with consultancy and advisory for power distribution and transmission projects catering to large and marquee state run power generation and transmission-distribution companies.

• In 9MFY2017 the company’s topline was flat Rs. 17,557 cr (Rs. 17,574 cr), whereas the EBITDA grew by 3.1% to Rs. 17,329 cr (Rs. 16,807 cr) and PAT surged by 10.3% to Rs. 4,927 cr (Rs. 4,468 cr). In FY2016 REC posted consistent results with topline growing 17.4% to Rs. 24,130 cr (Rs. 20,550 cr), EBITDA surging by 15.7% to Rs. 22,449 cr (Rs. 19,400 cr) and PAT grew by 6.5% to Rs. 5,691 cr (Rs. 5,344 cr).

• REC rewarded its shareholders with a very liberal interim dividend of 70% (Rs. 7 per share) in February 2017, the company also declared a bonus of 1:1 in the month of September, 2016. In FY2016 the company bestowed its shareholders with an attractive dividend of 171% (Rs. 17.10 per share).

• REC has a large equity base of Rs. 1974.92 cr but it is well placed in strong hands, with 60.64% held by the Government of India, 32.45% by Mutual Funds, Financial Institutions, Banks, Insurance Companies and FPI, leaving only 6.91% in the hands of the Retail Public Shareholders.

• At CMP of Rs.157.80, the stock is trading at a meagre P/E of 5.08x on FY17E EPS of Rs 31 per share. At such reasonable valuation, the stock is currently available at a huge discount to other NBFC companies like Bajaj Finance (FY17E PE-44x), Shriram City Union Finance ( FY17E PE-18x), L&T Financial Holdings ( FY17E PE-24x), M&M Fin. Serv( FY17E PE-20x) and the likes. The company looks attractive even when we compare it with S&P BSE Sensex (PE – 22x), S&P BSE 100 (PE – 24x) , S&P BSE 500 (PE – 26x) and Nifty Bankex (PE – 30x).

• The company has performed very well consistently and now the power sector reforms being given a full fledged push by the BJP government, the company is in an inflection point. REC consistently rewards its shareholders with healthy dividend, showing that the company is investor friendly with rising profits year after year. We believe that current valuations leaves a huge scope for a rise.