Rural Electrification Corporation: Electrifying Rural India

Rural Electrification Corporation (REC) is a financial company that helps power companies construct power projects and finances them. It is listed by SEBI as NBFC (Non-banking financial corporation). Its business is to provide loan to power infrastructure companies for distribution, transmission and manufacturing. The primary business of REC is to finance project based long term loan in power sector.

REC covers end to end power finance and consulting, starting from planning, financing to monitoring and change control. With enormous demand for power, it has a list of clients that are top power companies in the country. It has been instrumental in powering rural India’s growth by distribution and transmission of much needed electricity.

REC is well placed to reap the benefit of increased emphasis on power and infrastructure by the Government. It sanctioned 45000 crore (about $10b) in FY 2010.

REC’s financial muscle has enabled it to be on top performer in the Government owned companies list. It had phenomenal listing in the bourses and since then the company has given good returns to the investors. Let’s look at the financials in details to understand the company in detail.

Year	Mar ’06	Mar ’07	Mar ’08	Mar ’09	Mar ’10
Revenue (in Crore)	2,241.64	2,838.75	3,527.88	4,894.12	6,672.83
COGS	42.50	49.82	92.30	87.22	117.10
Gross Profit	2,199.14	2,788.93	3,435.58	4,806.90	6,555.73
Operating Profit	2,013.62	2,566.49	3,217.35	4,671.49	6,389.70
Net Profit	637.51	660.26	710.49	1,272.07	2,001.42
EPS	8.17	8.46	10.02	14.81	20.27
GPM	98%	98%	97%	98%	98%
OPM	90%	90%	91%	95%	96%
Current Assets	28557.71	34962.50	41724.08	54881.99	70309.84
Inventories	0.00	0.00	0.00	0.00	0.00
Total Assets (FA + CA – CL)	28237.54	34293.71	39650.48	51126.02	67028.57
Current Liabilities	1709.55	1926.96	3298.89	4841.73	4281.04
Long Term Debt	24039.22	30281.00	34282.79	44935.95	55948.23
Account Receivables	0.00	0.00	0.00	0.00	0.00
NWC	26848.16	33035.54	38425.19	50040.26	66028.80
SH Equity or Net worth	4198.33	4012.71	5367.71	6190.08	11080.34
Total Debt	24039.22	30281.00	34282.79	44935.95	55948.23
BookValue per share	53.78	51.41	62.51	72.09	112.21
Dividend (%)	24.5	22.67	30	45	65
Interest Charges	1355.77	1762.96	2052.81	2887.35	3896.07
Depreciation	1.1	1.13	1.39	1.36	2.16
EBITDA	2,154.03	2,756.14	3,216.97	4,808.79	6,595.75
Operating Cost	228.02	272.26	310.53	222.63	283.13
Growth in revenue		26.64%	24.28%	38.73%	36.34%
Growth in Net Profit		3.57%	7.61%	79.04%	57.34%
Growth in Inventory		#DIV/0!	#DIV/0!	#DIV/0!	#DIV/0!
TAX	159.65	331.79	452.28	648.01	696.10
No of Stocks (in Lakhs)	7,806.00	7,806.00	8,586.60	8,586.60	9,874.59
EPS	8.17	8.46	8.27	14.81	20.27
Cash and Bank Balances	680.64	178.77	874.65	328.89	675.59
Cash per share	8.72	2.29	10.19	3.83	6.84
Reserves	3,417.73	3,232.11	4,509.05	5,331.42	10,092.88
Reserves per share	43.78	41.41	52.51	62.09	102.21
Fixed Assets	23.75	55.37	70.25	56.63	67.1
EPS as per current shares	6.46	6.69	7.20	12.88	20.27
BV per share as per curr shares	42.51	40.64	54.36	62.69	112.21

The data looks excellent. Based on this data, let’s look at the performance of the company in terms of fundamental ratios.

Year	Mar ’06	Mar ’07	Mar ’08	Mar ’09	Mar ’10
Profitability Ratio
NPM	28.44%	23.26%	20.14%	25.99%	29.99%
ROA	2.26%	1.93%	1.79%	2.49%	2.99%
ROE	15.18%	16.45%	13.24%	20.55%	18.06%
Liquidity Ratio
Current Ratio	16.70	18.14	12.65	11.34	16.42
Quick Ratio	16.70	18.14	12.65	11.34	16.42
NWC to Asset	0.95	0.96	0.97	0.98	0.99
Interval Measure
Leverage Ratio
Total Debt Asset Ratio	0.85	0.88	0.86	0.88	0.83
Debt Equity Ratio	5.73	7.55	6.39	7.26	5.05
Equity Multiplier	6.73	8.55	7.39	8.26	6.05
Long Term Debt Asset Ratio
Interest Coverage Ratio	1.59	1.56	1.57	1.67	1.69
Asset Utilization Ratio
NWC Turnover	0.08	0.09	0.09	0.10	0.10
Fixed Asset Turnover	-7.00	-4.24	-1.70	-1.30	-2.03
Total Asset Turnover	0.08	0.08	0.09	0.10	0.10
Face Value	10	CMP	252.85	P/E Ratio	12.47
PEG Ratio	0.40	Revenue Gr (CAGR)		31.35%
PB / RoE Ratio	0.12	Op Profit (CAGR)		33.47%
Price to Sales Ratio	3.74

We will follow the same pattern; discuss positive points and concern areas and few details such as opportunity and risks. The investors then can take better decision.

Positive Points:

• The company is fairly valued at the PE of 12.47
• Net profit margin is excellent at about 30%. NTPC, another power giant has net profit margin about 18%. In fact this is improving for last 4 years.
• The ROE is attractive at 18%.
• The company is paying dividend consistently. The average dividend payout ratio in last 5 years is excellent at 35%. The yield at current market price is about 2.57%.
• Current ratio and quick ratio are excellent.
• The revenue and profit growth are very good. Both exceed 30%.
• EPS is good but that is because of high debt on the balance sheet of the company.
• This is also a Navaratna by Government of India but let’s not read too much into this. Most of our Navratnas’ have not been able to satisfy investors’ expectation.
• The loan given by REC is of high quality and the NPA is negligible at 0.03% in FY2010. REC’s loan while safe to a large extent, are concentrated on a very small number of borrowers.

Concern Areas:

• Cash flow is throughout negative for last 5 years.
• While the debt look high but this is normal for financial companies. In case of REC, it takes loan from Government at a cheaper cost and lends to private and public companies at some spread.

There are many good points in REC but the lending to public sector and state electricity board is sign of worry. The company should be able to manage with it as India is slated to grow and the demand for power is all set to touch new highs. While the potential growth and emphasis on power by the Government makes it an attractive investment, we should keep in mind the following risks.

This company is Government owned and hence has all the risk that a typical Government owned company in India has. Its performance depends heavily the GoI’s policy and hence susceptible to irresponsible action of the Government (like free electricity etc.).

The company’s loan to top 10 customers account for about 80% of the loan disbursed. This is a big risk because any default from these borrowers will impact financial stability of REC.

The biggest risk we may encounter is the fact that majority of REC is owned by the Government and power is a political issue and the Government acts very irresponsibly when it comes to power. We have seen the deleterious effect on economy because of free power schemes. Moreover, Government may also force REC to provide loan to other public sectors even if the other public sector firms are not on a sound footing. In fact, almost all the loans that REC has lent is to public sector electricity companies and state electricity boards.

Lastly, most of the Navratna’s are hyped up story. The Navrantas got their time under the sun because of monopoly and restrictive trade policies of the Government in license raj time. In today’s scenario, maintaining the lead will be difficult. REC can very well prove all of us wrong and do wonders for investors. However, as far as history is concerned, Government owned firms rarely have created wealth for investors.

Disclaimer: This site gives opinions on companies that trade on BSE and NSE. This doesn’t give any suggestion on whether to buy and sell. Investors are requested to go by their own judgment.

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