Rural Electrification Corporation (REC) – High dividend yield stock. Is it a good buy?

Myequity opinion | Date : 25-06-2018 10:30:00 IST

For new investors of a company, it is important to know the fundamentals of the company before buying any stock. Existing investors should also be aware of the company performance to decide between hold/sell decision. Here we present some of the facts about REC Ltd, to help you with your decision.

About company and its business:

Rural Electrification Corporation Limited (REC), a Navaratna PSU, was Incorporated in 1969 with primary objective of financing rural electrification scheme, hence the name “Rural Electrification”. The objective of REC was expanded to finance all kinds of power projects without any restriction in 2002. REC finances projects in the complete power sector value chain. REC provides financial assistance to state electricity boards, state governments, state/central power utilities, independent power producers, rural electricity cooperatives and private sector utilities which are critical to projected addition of installed capacity in the country.

REC is also a nodal agency for monitoring and implementation of Government of India flagship schemes – Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagaya), Deen Dayal Upadhyaya Gram JyotiYojana (DDUGJY) and National Electricity Fund (NEF). REC also assists Ministry of Power in monitoring of Ujjwal Discom Assurance Yojana (UDAY) and Power for all.

5 Year financial performance:

Coming to 5-year financial performance, except loan book and Book value which has grown at the rate of CAGR 10% and 11.41% pretty much all the other aspects have remained flat. Though loan book is growing at the rate of 10%, decrease in net interest margin and provisions has impacted the profitability.

Year FY14 FY15 FY16 FY17 FY18
Total outstanding loan 1,48,641 1,79,647 2,01,272 2,01,929 2,39,449
RBI repo rate (@ 31-Mar) 8.00% 7.50% 6.75% 6.25% 6.00%
Yield (Average rate of interest) 12.18% 12.30% 12.51% 11.64% 10.55%
Net interest margin 3.87% 3.94% 4.01% 3.51% 3.02%
Interest income 16,806 20,072 23,471 22,936 21,749
Other income 315 316 286 835 691
Finance cost 10,039 11,845 14,283 13,450 13,830
Other cost 239 313 339 351 342
Provisions 312 803 1,090 1,109 1,416
Tax expense 1,847 2,167 2,417 2,615 2,205
Net profit 4,684 5,260 5,628 6,246 4,647
Earning per share(Rs) 23.72 26.63 28.5 31.63 23.53
Book value 104.66 125.86 144.91 168.75 179.71
Dividend 9.25 9.75 14.7 12.1 10.05
Rs in crores

Asset distribution and quality

Financial institution asset quality dependents on the customers, their line of business and the performance of the sector. Below graph shows customer and category-wise distribution of RECs loan book.

Majority of the asset i.e., 86% (State+Joint) of asset will never come under NPA due to involvement of government, remaining 14% of the asset which is exposed to private sector may potentially be classified as NPA. Risk of these assets are also reducing due to improvement in power sector health on the back of Govt of India initiatives like UDAY, DDUGJY, competitive bidding and SHAKTI.

REC has lowest NPA when compared to peers in the sector, latest net NPA as of Q4-FY18 stands at 5.68%, out of which 3.61% was recognised as NPA in line with “RBI circular dated 12 Feb 2018 on Revised Framework for Resolution of Stressed Asset” though it is not applicable for NBFC companies like REC. This indicates the transparency and prudence of REC in maintaining the asset quality.

Stock performance

Listed in 2008 at Rs. 64.5* which is 23% premium over the issue price of 52.5* (Price adjusted to bonus issue) has delivered over 318% returns including dividend. Company has issued dividend of Rs. 108.65*/Share (*adjusted to bonus issue) since it is listed.

Opinion

Due to below reasons we believe that REC at current price of around Rs. 110/Share is very good buy for investors who seek for low risk investment.

  • High dividend yield of 9% at current price.
  • Good asset quality.
  • Attractive price. PE 4.6 and price way below book value of Rs. 179.
  • Improvement in power sector health.

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