Rural Electrification Corporation (REC) Equity Research

Date of Research – 20 January 2016

Price – Rs. 178.10

About the Company

Incorporated on July 25, 1969, Rural Electrification Corporation Limited (“REC” or the “Company”) is a listed public sector enterprise with a net worth of Rs. 17,454.38 Crore as on 31.03.13. The Company provides financial assistance to state electricity boards, state government departments, state power utilities, and rural electric cooperatives for rural electrification projects in India through its Corporate Office located at New Delhi and 20 field units , which are located in most of the States.

REC also offers debt refinancing; short /medium term loans to the manufacturers of power/electrical material for power projects; finance for the development of rural electric cooperative societies; and term loans for power generation projects .

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations13,525.7017,122.2120,383.9624,012.88 23,945.16 
Expenses440.61572.981,149.481,681.25 1,888.46  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)13,085.0916,549.2319,234.4822,331.63 22,056.70  
Depreciation3.904.518.3219.67 40.33  
Finance Costs8,005.8610,034.7411,839.7214,282.35 13,786.36  
Other income110.88106.73165.90117.05 740.84  
PBT5,186.216,616.717,552.348,146.66 8,972.36  
Tax1,353.431,875.462,207.922,455.24 2,658.99  
PAT (before Minority Interest and share of Associates)3,832.784,741.255,344.425,691.42 6,313.37  
Profit/ (loss) attributable to Minority Interest– – 
Share of profit / (loss) of Associates– – 
Consolidated Profit / (Loss) for the year3,832.784,741.255,344.425,691.42 6,313.37  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio96.7496.6594.3693.00 92.11 
Net Profit Margin Ratio28.3427.6926.2223.70 26.37 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Share Capital987.46987.46987.46987.46987.46 
Reserves & Surplus13,818.4216,542.3819,815.5924,085.1227,905.94 
Net worth (shareholders funds)14,805.8817,529.8420,803.0525,072.5828,893.40 
Long term borrowings76,553.6890,925.381,10,095.301,31,123.261,38,783.85 
Current liabilities17,362.7621,842.8421,407.1926,110.7337,914.58 
Other long term liabilities and provisions88.28269.04465.861,043.571,305.55 
Deferred Tax Liabilities172.92105.8047.54 
Total Liabilities1,08,810.601,30,567.101,52,944.32183,455.942,06,944.92 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Fixed Assets78.8680.6283.47119.78332.13 
Noncurrent Investments685.32590.851,643.031,157.212,202.14 
Current assets17,621.2015,180.4015,284.3317,878.6146,504.57 
Long term advances and other noncurrent assets90,233.321,14,705.581,35,933.491,64,300.341,57,906.08 
Deferred Tax Assets10.029.65– 
Foreign Currency Monetary Item Translation Difference Account181.88– 
Total assets1,08,810.601,30,567.101,52,944.321,83,455.942,06,944.92 

Efficiency Analysis

 
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
ROCE10.9410.9012.6412.3113.32 
ROE / RONW19.1719.3422.7921.3219.70 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)13,525.7017,122.2120,383.9624,012.88 23,945.16 
Growth (%)30.84 %26.59 %19.05 %17.80 % (0.28 %) 
PAT (Rs. Cr.)3,832.784,741.255,344.425,691.42 6,313.37  
Growth (%)35.02 %23.70 %12.72 %6.49 % 10.93 % 
Earnings Per Share – Basic (Rs. )38.8148.0154.1257.64 31.97 
Earning Per Share – Diluted (Rs. )38.8148.0154.1257.6431.97
Price to Earnings5.366.905.592.88 5.83 

Dividend History

The Company has maintained an average dividend yield of 4.17 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. REC’s average current ratio over the last 5 financial years has been 0.82 times which indicates that the Company may face liquidity constraints to pay for its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

REC’s average long term debt to equity ratio over the last 5 financial years has been 5.13 times which indicates that the Company operates with a high level of debt. A high long term debt to equity ratio is normal for a company which is primarily engaged in the business of finance and lending.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

REC’s average interest coverage ratio over the last 5 financial years has been 1.63 times which is optimal for a Company which is in the business of finance and lending.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, REC reported a promoter holding of 58.86 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 33.61 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.